Globalization and Transfer Pricing

Globalisation could be defined as “the interactive co-evolution of millions of technological, cultural, economic, social and environmental trends at all conceivable spatiotemporal scales (Rennen & Martens 2003). When discussing globalisation, the topic transfer pricing always seem to arise which could be because this multi-nationals trade between themselves and the government also uses transfer pricing. Therefore transfer pricing is used wold wide and could be said to be an important accounting factor which enables the success of a firm due to the fact its set up to induce optimal decision making in decentralized firms.

Transfer pricing could be defined when a company trades goods/services and the allocation of profits and taxes with another sub-unit of the same company in a different country (Matt Barbella 2011). The four major aims of transfer pricing is to provide information for making good economic decisions, provide information for evaluating the divisional performance, promote congruence and sub-unit autonomy. There are three major types of transfer pricing method that firms use to transfer goods/services. These methods are market-based transfer prices, negotiate transfer prices and cost based transfer prices. Although there are four major aims of transfer pricing, there is no actual transfer pricing method which fulfils the four purposes. Therefore managers are forced to make a choice to which purpose is to be fulfilled or to which method is to satisfy the objective at hand. For example, if a manager is to choose a method such as marginal cost transfer pricing, it motivates the short run optimal economic decision of the manager but undermines the concept of autonomy.

Market-based transfer price is a situation whereby...

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...countries, especially developed countries like America, England and Australia etc. use this guideline as a basis to monitor internal transactions. This guideline also reflects the arm’s length price principle. Countries like America could be noted to have over 300 pages on this topic. But the enactment of these regulations as a basis to monitor abusive transfer pricing is lagging in undeveloped and developing countries. The damaging effects of the transfer policy could be limited if the international co-ordination amongst countries tax authorities are enhanced.

Secondly, transfer pricing audits should be carried out in order to follow and monitor the transfer methods used by the firm. By constantly getting the report of each transfer policy used, the tax authorities would be able to monitor and also reduce tax evasion through transfer pricing methods.