Transfer Pricing in Multinational Corporations: An Integrated Management- and Tax Perspective

Transfer prices play a central role for both managerial accounting and tax reporting purposes in vertically integrated firms. Common to these purposes is that transfer prices ultimately determine the distribution of reported income across different segments (divisions) of the firm. The managerial accounting literature has long viewed transfer prices as an instrument for coordinating the production and sales decisions of different business segments. The tax-oriented literature on transfer pricing, in contrast, has largely viewed the transactions between business segments of the firm as given. The major focus in this literature has been on how a firm can minimize its worldwide tax liability within the confines of the arm's-length standard. In this article, we take an integrated view of managerial and tax considerations by analyzing how the optimal internal transfer prices depends on the admissible arm's length price and the applicable tax rates.