Academic Journals Database
Disseminating quality controlled scientific knowledge

TRANSFER PRICING FOR COORDINATION AND PROFIT ALLOCATION

ADD TO MY LIST
 
Author(s): Jan Thomas Martini

Journal: Australian Journal of Business and Management Research
ISSN 1839-0846

Volume: 1;
Issue: 6;
Start page: 07;
Date: 2011;
VIEW PDF   PDF DOWNLOAD PDF   Download PDF Original page

Keywords: Transfer Pricing | Coordination | Profit Allocation | Managerial Accounting | Taxation | Financial Reporting

ABSTRACT
This paper examines coordination and profit allocation in a profit-center organization using a single transfer price. The model includes compensations, taxes, and minority interests of two divisions deciding on capacity and sales. The analysis covers arm’s length transfer prices which are either administered by central management or negotiated by the divisions. Administered transfer prices refer to past transactions and therefore maximize firm-wide profit net of divisional compensations, taxes, and minority profit shares only for given decentralized decisions. From an ex-ante perspective, it is shown that adverse effects on coordination may result in inefficient divisional profits of which all stakeholders suffer. We motivate a positive effect of advance pricing agreements, intra-firm guidelines, and restrictive treatments of changes in the firm’s accounting policy. By contrast, negotiations ignore compensations, taxes, and minority shares but yield efficient divisional profits. Negotiations seem compelling as they perfectly reflect the arm’s length principle. Moreover, common practices such as arbitration or one-step pricing schemes allow the firm to engage in manipulation at the expense of other stakeholders.
Save time & money - Smart Internet Solutions     

Tango Jona
Tangokurs Rapperswil-Jona