Transfer Pricing and Organizational Structures in Multinational Companies - to Formally St

Description
Multinational companies have incentives trainee’s use-tax
differences between countries and make transfers of profits in
low-tax countries through transfer pricing. At the same time,
however, they are also often used the internal coordination
and possibly as a strategic competitive tool. The article
discusses formalana-lytic models of the recent past and
analyzes how companies set off against-nung prices and
organizational structures for different forms of competition and
allowable transfer pricing methods optimally precise and
more if there are incentives to "active" transfer pricing policy.
In addition, it is examined whether and how company change
their behavior when an opening allowable transfer price
reductions consider possible sanctions by the tax authorities by
themselves.

Corresponding Author: Syed Ahmad Mustafa Shah



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© Author(s) 2015. CC Attribution 3.0 License.

Research Article Volume 1-1 (2015)


Transfer Pricing and Organizational Structures in Multinational Companies - to Formally State of Knowledge of
Theoretical Analysis.

SYED AHMAD MUSTAFA SHAH

Accepted 25
th
February, 2015.

Abstract

Multinational companies have incentives trainee’s use-tax
differences between countries and make transfers of profits in
low-tax countries through transfer pricing. At the same time,
however, they are also often used the internal coordination
and possibly as a strategic competitive tool. The article
discusses formalana-lytic models of the recent past and
analyzes how companies set off against-nung prices and
organizational structures for different forms of competition and
allowable transfer pricing methods optimally precise and
more if there are incentives to "active" transfer pricing policy.
In addition, it is examined whether and how company change
their behavior when an opening allowable transfer price
reductions consider possible sanctions by the tax authorities by
themselves.

Keywords: Arm's length principle, tax regulation,
multinational corporations, strategic competition, transfer
pricing, centralized and decentralized organizational,
managerial accounting, incentives

1.0 Introduction

Since transfer prices are a key instrument of control of
the company, they were in the past decades, always a
focus of theoretical research. The basic-applied analysis
of Schmalenbach (1908/09) and Hirshleifer (1956) have
been successively extended play tert regarding
organizational issues, in particular the allocation of
decision-making and property rights, consideration of
investments in product qualities and capacities, the
inclusion of different risk settings decision-makers, time
and Information structure, market and competition forms
and in particular the Steuergesetzge-environment.

Neglecting multinational enterprise activity already exists
wealth economic problems. Pfaff/Pfeiffer (2004) provide
a comprehensive overview of three-central directions:
Working in the tradition of neoclassical economics,
agency-theory contributions as well as models based on
transaction costs and incomplete Verträgen.
2


The topics discussed in these approaches, economic
aspects are supplemented by additional effects and
overlays, if you extend the focus on the design of
transfer pricing systems and organization structures in an
international context. Companies now have strong
incentives using transfer pricing to shift profits "tax
havens". In addition, under-different legal frameworks,
additional actors (Finanzveraltungen, legislators), and the
present between these conflicting goals and information
asymmetries should be taken into-term. The following
article discusses key findings formal analytical analyzes.
Main aspect is the question of how companies use
when selecting the transfer pricing and the organization
in the face of various forms of competition Gestal-tung
opportunities and behavioral changes that arise if the tax
authorities sanctioned an illegal transfer pricing policy with
penalties.

Construction of contribution: Section 2 discusses aspects
that have significant influence on the analysis of transfer
pricing and organizational structures in an international
context. The focus is on the transfer pricing and forms of
organization with the goal of coordination and control of
behavior (Managerial Accounting). In Sections 3 and 4
monopolies or duopoly issues of organization and Ver-
bill rates are discussed in detail under different
conditions for the competition forms. Section 5

Illuminates the perspective of the financial administrations
shape the basic. Section 6 summarizes key findings and a
brief outlook.

2.0 Essential aspects of cross-border business activities

While some aspects of the entrepreneurial competition
represent steady conditions, they can be endogenously as
de-makers with the inclusion of tax authorities.

a) Legal Framework - level of rates

Different tax rates are the main reason for an "active" set
off against voltage-price policy of the company, as they
have the incentive to profit by means of offset against-
voltage praise expel as possible in "tax havens".

- Double taxation agreement and regulatory measures

Basically repatriarisierte gains from further taxation
fully-accepted or has already taken place taxation
abroad, we domestically angerechnet.
3
In particular, in the
first case - which is assumed in this work - companies
have an on-irritant, discretions for the election transfer
pricing to minimize the Gesamtsteu-erlast to use. To
prevent excessive transfer of profits and tax disputes
between tax administrations is generally required that the
transfer prices have to satisfy the socalled arm's length
principle. This means that connected sub-accept
international transfer pricing have to choose, as if a trade
between unverbun-which company was suffered. Where
they exist, are transfer prices should therefore base on the
market price of an intermediate product. Tax motivated
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companies have incentives to violate this principle.
Although Art. 9 of the OECD Model Tax Convention
provides that should make an appropriate income tax
adjustment in this case both countries, most double
taxation agreements are available only for the
disadvantaged financial management the right to enforce
its rightful income tax shares, without the other country
corresponding tax benefits for the company performs.
In fact, results from this sanctioning the company
through double taxation, which may still be subject to
additional Sanctions measures. It may be worthwhile for
the company, despite Moeglicher sanctions to break the
arm's length principle.

- Other conditions: control types, trade restrictions, tariffs

In a separate analysis should therefore be dispensed with
in the scope of this paper.

- Transfer pricing methods

Transfer prices are multinational companies to make a
pro rata Gewinnzuord-tion of the company's profits in
various tax jurisdictions in the operating-union practice a
variety of methods that can be determined with the aid of
transfer pricing and legitimized as against third parties
exist: 4 price comparison method [Comparable Un-
controlled price method (CUP)], cost-plus method [Cost
Plus Method], funktionsorien-oriented profit
decomposition [profit split method (PSM)] net margin
method [Transaction Net Margin Method (TNMM)],
Comparative Study [Comparable Profit Method (CPM)]
and the global for-profit association melhafte [unitary
taxation (UT) or formula apportionment (FA)]. Here, the
first-mentioned methods define a direct or indirect
transfer pricing, which is used for apportionment
between countries (transaction based methods). In
contrast, the two-letztge methods mentioned have no direct
reference transaction. Proponents of Formulary
apportionment argue that the company has no incentives to
"active" settlement price policy gebe.
5
this is verified in our
analysis.

b) Market structure and strategic interaction

Degree to which companies have market power and what
are their primary decision variables? Typically, a
distinction is made between competitors on a perfect
market (price takers), monopolists and oligopolists that
interact with each other either in price or quantity
competition.

c) Centralized or decentralized organization

Which property rights are held by the headquarters and be
perceived by the public who-to and which are to
decentralized critical business areas abgetreten.
6
The
sense-full organization is strongly dependent on the
form of competition, the extent of potential
environmental uncertainties concerning. Cost and
revenue parameters and the question of who
information about their Implementation receives. For the
case of decentralized organization and oligopolistic
competition may come next tax also a competitive
strategic importance of transfer pricing.
d) "One set or two sets of books"?

If tax scheduled transfer prices zoom-drawn also to the
internal management or to a separate transfer pricing
system for behavior control are ge-cares? The latter opens
degrees of freedom in the control of distributed
enterprises, as they can be specifically geared to the
present in the company offs and information
asymmetries. On the other hand, causes the separation of
fiscal and anreizorien-oriented transfer pricing
documentation increased costs and sometimes leads to
Mainstream acceptance problems in the Mitarbeitern.
7

e) Decision makers and objectives

For companies can legal framework adopted
unchangeable who-den.
8
Overlooking the maximization of
the company's profits after tax are the choice of
organizational form and the unit prices for the Central
significant control variables. In a central organization
she meets trading and investment decisions them,
whereas it merely defines the internal environment in a
decentralized organization, under which then make the
divisions trading and investment decisions. By designing
compensation systems which also affects the central
objectives of the areas. This area often serves as
performance gains size. When using a uniform transfer
pricing system ("one set of books") is hereby 1) the pre-tax
gain or 2) the post-tax profit in question, thus both also
take into account the offset against the tax-settlement
price. Does the company use separate incentive-based
offset against-opening prices for internal control come
and 3) the behavioral pilot Gewinn9 or 4) the behavioral
pre-tax profit minus the actual tax payment in the country
as target variables in question. While the former takes into
consideration only incentive based transfer pricing,
internal and external settlement price influence in the
latter case the behavior of the area.

If one extends the consideration of decision-makers at the
level of tax authorities and national and international
legislators, the following outcomes are possible: 1) tax
revenues, 2) national welfare and outcomes (tax revenues,
corporate profits, Kon-sumentennutzen, jobs, investments)
and 3) global welfare. Entscheidungsva-variables to achieve
these goals are especially tax types and level of rates,
down to-permeable transfer pricing methods and
measures to enforce legal Vorschrif-th (documentation
requirements, control measures and penalties where
appropriate).

The OECD Guidelines want to shift the goal of neutrality by
calling in the arm's-length principle. However, the
individual states' interests are often this goal entge-
gen.11 Wellisch (2003) and other contributions therefore
discuss this critical and make the decision criterion of
neutrality in the Mittelpunkt.
12
This requires that the
decision behavior of an undertaking in the presence of
taxes and application admissible should be
Verrechnungspreisme-methods unchanged compared to a
situation without taxes and tax rate differences. Basis for
the analysis of monopoly and duopoly scenario Below, we
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How to Cite this Article: Syed Ahmad Mustafa Shah "Transfer Pricing and Organizational Structures in Multinational Companies - to Formally State of
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examine how companies use design options in the
choice of transfer pricing and organization in the face of
various forms of competition. The two in the recent formal
analytical literature intensively discussed methods are
analyzed in detail: comparable uncontrolled price
method (CUPM) and global formulaic profit allocation
(UT or FA). For the comparable uncontrolled price
method, it is assumed that - where they exist - either the
market price of the intermediate product must be dialed
immediately as transfer pricing, or by the tax authorities, a
corridor tu <t <to allowable transfer pricing is set. Of
Supply transfer prices within the interval of the arm's
length principle (arm's-length basis-set) will be fulfilled
angesehen.
13
contrast to the global formula based profit
allocation (UT / FA), it is assumed that the tax authorities
took part in reaching understanding on a profit sharing
conditions, for example, is calculated as: taxable income in
country 1 = Income before taxes · [? · (Revenue
Country 1 / world sales) + ? · (invested capital in
Country 1 / investments worldwide-oriented capital)], with
?, ? ? [0,1].

For simplicity, it is assumed that no single Import duties
exist and international goods arbitrage is not advantageous.
Unless otherwise indicated-accepted, it is assumed that the
companies legal guidelines for selecting the settlement
prices einhalten.
14

3.0 Transfer pricing and organizational structures in
the monopoly

Consider a multinational company whose area 1 (Region 1)
created a product that can be sold on the domestic market
or delivered to area 2, the ab puts it in country 2. The
quantities are denoted by xi, where for area 1 marginal
cost c per unit anfallen.
15


The internal power exchange is valued at the settlement
price t, which is determined by the control panel. Ri (xi)
denotes the revenue in country i for which applies Ri`` (xi)
<0
th
The profits of the two divisions are subject to taxation,
s or S of the respective Country in question. After taxes are
the area gains Gi and corporate profits G:

G = (1 s?) [R (x+) ? ?x t c (x+x)], G = (1 S?) [R (x -) ?t x] and G
=+G G .
16


1 1 1 2 1 2 2 2 2 2 1 2

3.1 Identical rates (s = S)

Substituting identical tax rates in the profit function of a
company, it is clear that the height of the transfer price has
no effect on the level of company profits. For centrally
controlled company headquarters chooses the volumes
x1 and x2 * * such that for both markets, the criterion
marginal revenue = marginal cost met. Used in a
decentralized organized-company transfer pricing t only as
a steering rate for the areas that makes independent
decisions on sales volumes.

Therefore, the central anticipated the decision calculus
of area 2, R2` (x2) = t. By properly setting the clearing
price at marginal cost, the Central induces efficient sales
volume.



3.2 Different tax rates (s ? S)

3.2.1 Central Organization

a)Comparable uncontrolled price method (Comparable
Uncontrolled Price Method)

If there are different tax rates of transfer pricing t the
company's profit after tax affected. Depending on the
permissible tax transfer pricing and the ruling between
countries tax difference now arise always corner solutions,
since ? G / ? t = (Ss) · x2. Here-below: t = t, if s <S and t = tu,
if s> p.
17
This tax-motivated transfer pricing choice also
influences the choice of the volume sold, as the first-order
condition shows:

G ? / ? x2 = (1-S) · R2` (x2) + (s-s) · t (1-s) · c = 0th for s <S,
the monopolist chooses a price above marginal cost
transfer price. In order to do justice in the country 2
(after-tax) calculus marginal revenue = marginal cost,
the monopolist makes an adjustment to the sales
volume, which thus deviates from the optimum sales
volume for identical tax rates. Just in case that the marginal
cost c correspond precisely to the upper limit of the
allowable interval occurs no distortion of trade and sales
volumes for s <S.

b)Formulary apportionment / Formula Apportionment

For a simple illustration of the operation, it is assumed that
each of the taxable profit according to the relative share of
sales of the regions shows that ? = R1 (x1) / [R1 (x1) + R2
(x2)] and ? = 0th the company's profit after tax is thus
obtained as:

G = (1 - (1 ?S) -? (1?= [(1- s??) +- (1 ?S) -? (1?)] [(R+1 (x1) R-
2 (?x2) +c (x1 x2)]. If the s??) ?+G) G

Companies Select permissible values of the distribution
parameter within an interval ?u <? <?o Can give legitimacy
to the tax authorities, there is yet a corner solution,
depending on the tax rate differential. Because of ? G / ? ? =
(Ss’) · [R1 (x1) + R2 (x2) -c · (x1 + x2)] follows ? = ?o for s
<S and ? = ?u for s> p. obviously, the maximization of the
pilot-profit leads to the maximization of the company's
profit after tax. This result, however, only applies as long as
the company does not affect the limits of the permissible
interval by its activities kann.
18
if the tax authorities can
verify the exact sales ratios and claim its application, the
interval degenerates into actual sales ratio ?, which then
also the just requirement for independence is violated

3.2.2 Decentralized organization

While the question of a separate transfer pricing system for
behavior control does not provide for centralized
organization consists of decoupling with decentralized
organization the opportunity to internal corporate control
of the external (at least partially). In the-case, the
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company maintains addition to the transfer pricing tSteuer
a second settlement price system ("Two sets of books").



Behavioral offset against-nung prices are with tAnreiz
hereinafter referred to exclusively as part of internal
control is used com-men. If only a transfer pricing system
is maintained for internal and external reporting purposes,
the transfer prices are still designated t ("One set of
books").

a) Comparable uncontrolled price method
(Comparable Uncontrolled Price Method)
19


If the center uses only a transfer pricing system ("one set of
books"), the transfer price is now t "Servant of Two
Masters": the tax minimization and incentive schemes. The
limits of the allowed interval would be fiscally
motivated the headquarters again like to draw off. The
precludes the goal of setting the transfer price at
marginal cost in order to set appropriate incentives for
trade area 2. Due to the coupling of the settlement price at
the market price (t = p1 = market price in Country 1) it
follows that now two-Management decisions of the areas
are not independent of each other. For a higher sales price
in country 1 is uno actu associated with the increase in the
transfer price and therefore a distortion of the sales volume
by area 2, for which the internal procurement costs stei-
gen.

The center now weighs monopoly profits in country 1 to
country 2 and monopoly losses in the ceteris paribus
incoming tax gains from a higher unit price for each intra-
operatively-lich-traded unit against each other. From these
three aspects follows: If the monopolpreis, P1m is smaller
for the intermediate product in country 1 than the
upper limit of the allowable interval P1m <to, is also the
optimal transfer price to below. In addition, can be linear
price-demand functions show that the incentive problem,
the tax cut motive do-nated ie that the monopoly price is
already P1m the upper limit of the optimal settlement
price t. This is calculated as a weighted average between
marginal cost c of the production and the monopoly price
P1m in country 1, wherein the weighting by the different
tax rates determined wird.
20
Just in case that the monopoly
price in Country 1 exceeds the upper limit of the allowable
transfer pricing, P1m> to be, for sufficiently large
differences in tax rates of Ver-bill rate t = to set.

Be separate transfer pricing systems used for internal and
external reporting purposes ("Two sets of books"), the
divisions can channeled through the incentive-based
pre-tax profit minus the actual tax payment werden.
21

Compared to a single transfer price system thus
becoming the central one degree of freedom in controlling
the company. Assuming that there is always scarce
capacity, i.e. always exists-full capacity, it can be shown
that the company's profit increases when the internal
transfer pricing tanreiz compared to the market price p1 is
provided in Country 1 at a discount ?: tanreiz = p1-?.
22

For determining taxable income on the other hand -
according to a strict Implementation of the comparable
uncontrolled price method - the transfer price tsteuer = p1
recognized.

The reason for this is as follows: With a full load leads a tax
rate difference, s <S, an increase in the internal supply in
the high-tax country compared to a scenario with identical
tax rates. This was due to two effects. The Umalloziierung
of production capacity is associated with a lower
production and sales volume in 1 country opposed to an
independent optimization increases there so the sales
price, which is also the relevant tax transfer price. For
the calculation of the tax payments of the settlement price
will be determined for all the products internally supplied.

The resulting tax-saving effect is first order, whereas
the Gewinnreduzietion associated with the amount of
reduction is a second order effect in pre-tax country 1.
Is paid for this tax-saving Effect by recall bias in both
countries. Uses the center now also possible to decouple
the internal transfer price from the external and lower
transfer price to set, so they can destroy alleviate the
problem of distortion amount without the tax benefits.

Baldenius / Reichelstein (2003) show that the assumed
for the above result Vollauslas-tung premise is driving for
the result. In a scenario without taxation guide them in
capacity is tight for a forth sufficient conditions under
which through internal price reductions effective selling
prices and trading volumes can be induced. Second, they
show that unlimited capacity internal price reductions are
not able to induce efficient trading volumes and only under
specific conditions (eg linear price-demand functions)
lead to an increase in corporate profits. This Negativre-
sultat memorized even if the tax rate differences.

b) Formulary apportionment/ Formula Apportionment

As described above, this method aims to transfer pricing
independent possible determination of taxable profits.
Transfer prices have only - if at all -indirect influence
on the distribution of profits, since they can be used to
affect the figures included in the revenue distribution
formula.

However, all figures are not necessarily of the divisions
affected werden.
23
A for this purpose ausgestaltetes
transfer pricing system is thus strongly behavior oriented.
In as much as the strict application of benefit-sharing
formula without discretion and all the key figures of the
divisions are influenced, the boundaries between "one set
of books" and "Two sets of books" are blurred here. On the
other hand, not all metrics impressive-flussbar or the
company can choose the tax profit shares within certain
limits free, so are generally differences between fiscal
transfer pricing and steering Price vor.
24
As with centrally
controlled companies, the independence of the limits on the
profit attributable condition that - but only in special cases
- can be made non-tugging lot of decisions. If the interval is,
however, degenerated into a strict application of the
formula, this condition is violated here regularly.

3.2.3 Choice of organizational form

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If all environmental parameters are considered
deterministic, the company incurred considered above
scenario not benefit from decentralization of decisions: De-
centralization dominates centralization (weak). Since no
competition strategy Effects or imperfections in
information processing are present; the control panel can
implement any decentralized solution also central. For s <S
obtained in the decentralized scenario by the tax-driven
choice of transfer pricing, t = to, a distortion of the
heel volume and thus a lower profit than with central
control.

This uniqueness result changes when one takes into
account uncertainty about cost and revenue parameters.
Naraya-nan / Smith (2000) analyze the relative advantage
of the organizational forms with constant marginal costs
and linear Inverse demand function, where they model the
marginal cost and the constant term of the demand
function as random variables. While the actual marginal
costs are generally observable, the expression of the
demand parameter is observable only for the areas, but
not in the center. Narayanan / Smith (2000) provide a
lower limit Moegli-cher transfer pricing, the actual
marginal costs, tu = c, and show that for s> S decentralized
solution is dominant, whereas provide a framework for a
limit for the variance of the demand parameter for s
<S. If the actual variance is greater than the threshold,
decentralization is advantageous, otherwise centralization.
Because for s> S, the transfer price is t = tu = c set.

Thus, it is caused by the transfer price no distortion of
trade amount. The advantages of decentralization results
from the fact that the divisions can take into account the
Information on the demand parameters in the choice of
sales volume, whereas the center could only decide on the
basis of expectations.

For s <S, the transfer price is set equal to the upper limit
of the allowed interval and always leads to a lot of
distortion. At high environmental uncertainty, this
drawback of decentralized organizations ion is oversize
compensated by the benefits of information regarding
evaluation of the demand parameter. At low environmental
uncertainty, however, this information advantage is less
important, which is why the central organization is
preferable. Solving the adoption tu = c, so is particularly
suitable for s> S find a trade-off.

3.2.4 Perforation and enforcement of regulations

Kant (1988) examined the effects of a possible sanction
of the financial services network -management if they
can impose a penalty the company at uncovering an illegal
break the arm's length principle. He receives the intuitive
result that a higher penalty envisaged, the company also
prompted to choose his transfer price less different from
the arm's length price. It is also clear that, despite the
threat of criminal openings of the arm's-length principle
take place, which the company tax minimization and
avoidance Criminal weigh against each other.

3.2.5 Inclusion of ex-ante investment

An interesting extension of the above scenarios discussed
Smith ( 2002a ) , who investigated the effects arise if the
company can make ex ante investment in reducing unit
costs or increase in sales revenue. He shows that the
company has more higher incentives to invest, the greater
its discretion in the choice of transfer pricing, ie in the ex -
post held tax minimization.
25
Here, a reduction of the
transfer pricing regulation may both to higher corporate
profits and higher tax revenues.

4.0 Transfer pricing and organizational structures in
oligopoly

In the subsequent two companies are considered, which
in Country 1 create one product with constant marginal
cost c, which is sold on the domestic market and is
delivered to offset against it-settlement price in the sales
area in country 2. While for country 1 perfect competition
is assumed (i.e., the arm's length price realized at the level
of marginal costs c), the companies are in Region 2 in
dyopolistischem competition. The two paragraph products
of the companies in the country 2 are substitutes, so that
for the competitors in each relevant demand xi can be a
function of the prices p12 and p22 represented as follows:
xi2 = a-?i · pi2 + ?j · pj2 with ?i> ?j> 0
th
25 In his analysis
he makes a special form of modeling the comparable
uncontrolled price method (CUP) by could divide the
negotiating profit, independent companies from
investing activities as between the divisions shared among
"added value" investing activities modeled. See, Smith
(2002a), p. 173ff. He also analyzes the Comparable Profit
Method (CPM). Similar modeling of CUP and CPM are also
found in Halperin / Srinidhi (1987.1991, 1996) and Sansing
(1999).

? be with IGP

Country scored 1, so

? i1=(1 ?s) ? (+IGP -the profits referred to the company i
on the intermediate market are the area ?i1 gains and
corporate profits ?i as follows:

(T?ic) xi2), ? i 2= (1 ?S) ((p-i ?ti 2) xi2) and ? i= (1 ??s) +i1
(1?? S) i2.

4.1 Identical rates (s = S)

In contrast to the monopoly scenario in which the
organization of the company on the market power does not
matter in terms, it is now crucial. As companies are in
competition with each other dyopolistischem, consist of the
pricing and quantity decisions interactions that take
account of both centers within the Entscheidungsfin-
making. Price and quantity decisions must now form Nash
equilibria. If the company is decentralized, the sales areas
make their decisions based on price or quantity of transfer
pricing and not - as the center - on the basis of marginal
cost.

In mutual observability of transfer pricing these can now be
used as a strategic variable to avoid competitive
disadvantages compared to the competitors or even to
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obtain benefits. It is dominated with identical tax rates, the
central of the decentralized corporate management.
26
.

This causes both competitors prefer a decentralized
control. Since price competition (quantity competition) the
prices of the Kon-competitors strategic complements
(substitutes),
27
put the central one lying above (below-
half) of the marginal cost c transfer pricing (strategic
competitive effect).



4.2 Different tax rates (s ? S)

For the following statements is first considered and placed
under decentralized companies that the market price on
the intermediate market, p1 = c, is attracted by the price-
comparison method as a measure of transfer pricing.

a)Comparable uncontrolled price method (Comparable
Uncontrolled Price Method)

Even with dyopolistischem competition between
companies with uniform accounting ("One set of books “)
causes a difference in tax rates, ceteris paribus, that
companies have an incentive to use transfer pricing to be
shown gains in " tax haven " .On the other hand, have
transfer pricing now a strategic impact that reinforce the
Control Mini mierungseffekt or oppose this and possibly
can dominate. Then for s <S at low differential tax rates that
in quantity competition (price competition) a Ver-bill rate
is chosen the marginal cost below (above) where the tax
minimization, a high transfer price to choose wäre.
28
The
same is true for s> p. Thus, this method gives incentives to
"active" transfer pricing policy.

Be separate transfer pricing systems used ("Two sets of
books"), it is clear even-if the incentive to break the arm’s
length principle. Assuming that the areas of the
incentive-based tax profit minus the actual tax payment
maxi-mize, this leads ceteris paribus means that the
company's tax settlement price - want to start as high or as
low as possible - depending on the ratio of tax rates.

b) Formulary apportionment/ Formula Apportionment

Whether this method has influence on the transfer pricing
policy of a company depends on the extent to which
transfer pricing besitzten a direct or indirect influence
on the identification numbers that go into the formula
for benefit sharing. If we assume a uniform transfer
pricing system ("one set of books") and you attack the
already discussed in the monopoly scenario measure the
amount of goods on, it is obvious in view of the above
discussion that a locally controlled companies on the
choice of transfer pricing, the sales in the individual
countries can control. Nielsen / Raimondos-Møller /
Schjelderup (2004) illustrate this with an amount of
contest: For s <S, the company has the incentive to reduce
sales in country 2, so as to reduce the average taxation of
the company. The tax reduction thus motivated a price
above marginal cost transfer price.

In contrast, the strategic competitive effect induces a
lower-than-marginal cost transfer pricing for quantity
competition. The optimal transfer price is now
dependent on the relative strength of these two effects.
For s> S, however, both effects are aimed in the same
direction. Thus, the tax saving effect reinforces the
strategic competitive effect and leads to a significant-lich
lower than the marginal cost transfer price. Similar effects
can be found in price competition. In addition, a method of
apportionment based on sales ratios leads in here Even
more "active" example discussed on a transfer pricing
policy of the company as the Preisvergleichmethode.
29
In contrast, there is no incentive for an “active" transfer
pricing policy reflects the analysis of Hyde / Choe (2004)
found that the use of separate transfer pricing systems
("two sets of books") is present. They assume that the
profit attributable to equity shares are attributed to
countries according to the relative volumes, the target
of the company’s divisions is: area = profit incentive-
based tax profit minus the actual tax payment. In the area
of incentive-based pre-tax gain offset against the internal-
settlement price tAnreiz flows.

Since the profit attributable to equity allocation follows the
countries on the basis of sales volumes, which are also part
of the incentive-based range profit before tax that area no
tax transfer pricing tSteuer considered in the choice of sales
volume. The off-design of the proportionate profit
allocation thus establishes a separation of the effects.

4.3 Choice of organizational form

The presence of strategic competitive effects that result
in identical tax rates to the strict dominance of a
decentralized organization, and the fact that most
models assume dyopolistischem competition with this
form of organization, suggest a general
Vorziehenswürdigkeit. Narajanan / Smith (2000) show,
however, that this does not apply at below-ent taxation.
The reason for this is the double functi decentralized
control the transfer price, if only a transfer pricing system
is performed. For a tax motivated transfer pricing change
results in amount of distortion than with cent controller
is superior.

4.4. Perforation and enforcement of regulations

The following should be analyzed in turn, how firms
behave when a can by arm's-length principle may lead to
a possible sanction.

4.4.1 "One set of books" 30

Based on the above baseline scenario, it is assumed
that both decentralized sub controlled by a single
transfer price system. However, the tax authorities
sanction the transfer price reduction of the company, if you
are an out of her View detects adverse deviation of the
transfer price from arm's length price c.

For Region 1 (2), this falls below (timeout) is given the
marginal cost. The arm's length principle injury to lead to a
sanction in the form of a recapture, where .phi..Sub.i
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the probability sanctioned a departure. The expect ? = (1
?s) ? (+ZP - (t?c) x) Profit after tax country 1

i i i i 2

+ (1 S?) (p t?) x profit after tax Country 2

2 i i2

-? ?s?max {0, c ?t} x, where appropriate penalty in Country 1

I 1 i 2, where appropriate penalty in Country 2

? 2?S?max {0, ti} c?xi2

In the absence of controls by the tax authorities (? 1, ? 2 =
0) is determined to set off against voltage-price policy of
the company so only b competitive effect. Figure 1a
illustrates the choice of settlement prices. Of particular
interest is the range B2. Here, the strategic effect dominates
the design of tax minimization. In contrast, in the fields B1
and C are aimed both effects in the same direction and
lead to transfer pricing below marginal cost, while in
region A dominates the motive of tax avoidance and leads
to high transfer prices. Along the border between domain A
and B2, a transfer price length price c is set.



Figures 1a and 1b: Transfer pricing in Steuerminimierungs- and strategic competitive effect (left)
as well as to avoid criminal sätzlichem - effect ( right)

Positive control probabilities ? i> 0 then lead to the fact
that the company must also include an expected penalty in
the form of double taxation in their calculations. Figure
1b illustrates the consequences of now has to be considered
criminal prevention effect on the choice of transfer pricing.

In the regions A and C , the high difference in tax rates to
the dominance of the Control Mini mierungseffekts , with
supply in region C , this effect through the strategic
competitive effect is reinforced. This effect is also crucial
that region B in turn Area.

Includes, in which the strategic effect dominates the tax
effect (this is the case for tax combinations above the
bisector). On the possible sanction of the financial
management in opening the arm's length principle, the
company now responds by setting D1 and D2 transfer
prices equal to the arm's length price in the fields. The
aspect of criminal avoid this dominates the other two
effects and edge solution: ti = c * is realized.

This area is D1 (D2 region) by the threat of punishment
from country 1 (Region 2) motivated. With increasing
control probabilities, i.e., with an increase in the expected
penalty, the regions D1 and D2 stretch for "southeast" and
"Northwest" from.

What is interesting is that the increase in the complication
probability, ie the expected punishment in Country 1 to
higher corporate profits and higher tax revenues at the
same time in both countries-County leads.

Because by the penalties in the amount of competition
between the companies is performed less aggressive and
selling prices move in the direction of the monopoly price.
Essential for this effect is the fact that both companies use a
standardized set off against voltage-price system for
internal and external control.

The expected penalties provide a credible self-
commitment of the company to high transfer prices,
making a sharp quantity competition is prevented. For
Country 2, however, no such effect of stricter
punishment is determined, as these cause a reduction of
transfer prices and thus increased competition.

4.4.2 "Two sets of books”
31

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Hyde / Choe (2004 ) analyze the effects of sanctions
for break the arm's-length principle for decentralized
companies that use separate Verrechnungspreissys -
systems for internal and external control. They assume
the case s < S, so that the highest possible tax transfer
pricing will be sought in the context of tax minimization.
Penalties by the tax authorities lead to a lowering of the tax
bill Ver- price in the direction of arm’s length price. On
reducing the tax burden area would respond with an
expansion of sales volume, which would be associated with
profits.

To counteract increases the incentive-based headquarters
Verrechnungspreis.
32


5.0 Consideration of financial management systems as
decision-makers

5.1 On the criterion of decision neutrality

If the tax authorities are pursuing the goal of
Entscheidungsneutralität
33
, the above results on ground
versions, the rather depressing picture that almost
settlement price methods - apart from special cases - to
ensure no general neutrality. In the comparable
uncontrolled price method, it is possible for s <S in
monopoly scenario only for the special case that the
upper limit of the allowable interval is always set by
the tax authorities at marginal cost, decision
neutralityherzustellen.
34
an unrealistic assumption.
When using the Formulary apportionment same applies
and the interval limits must not be affected by the
transactions of the company.

In strict application of profit-sharing formula without
variation, this assumption is regularly violated, unless
the incoming to the Open division formulaic indicators
fulfill a separation criterion and are of the Trans-actions,
their profits will be taxed, completely independent. Or
the organizational structure of the company and
incentive schemes makes provision for this separation
by the type of internal incentive schemes (see. Section 4.2).

5.2 Competition between tax authorities

The preceding analyzes have highlighted how diverse are
the effects that result given the legal regulations for the
control of central and local businesses. In the analysis of the
"meta-game" of financial administrations themselves,
35

these effects are taken into account, which of course a
significant overhead of formal analysis brings with respect
to the modeling of a company as a "key decision makers".
However, a closer relationship between primary
internal corporate control (Managerial Accounting /
Economics) and the primary public finance allocated
approaches should be sought in order to make
informed statements in the current discussions about
international tax harmonization and regulation betriebli-
cher billing rates.

The results discussed in this paper present the results
of part playing the "meta-game" is that can be
incorporated into a link of model approaches.

6.0 Summary and Prospects

The article examines how companies choose transfer
pricing and organizational structures in different
contexts. These differ in the contest form in the markets,
the tax differences between countries, methods for Festle-
gung tax transfer pricing, and possible sanctions if a
non-tax allowable transfer pricing choice is revealed by the
tax authorities. It turns out that - apart from a few special
cases - different tax rates generally leads to a tax-motivated
transfer pricing Setting and a distortion of allocations. In
the choice of organizational form and transfer pricing in
particular the degree of environmental uncertainty and
information asymmetry as well as the degree of
utilization Kapa play a crucial role? Further research is
needed also the role that government regulation for
Unternehmensge-profits, tax revenue and welfare aspects
of how we effect of risk aversion of the decision makers
in connection with different offset against-ment price
policies and regards the inclusion of capacity and
Qualitätsinvestitio-nen in the Analysen.
36
play, is in need
of clarification.

For more restrictive of discretion for tax transfer pricing
work at Einbe-relationship of quality investment (. Smith
(2002a)) and oligopolistic price competition rather
negative both on corporate profits and tax revenues,
whereas in oli-gopolistischem amount of competition they
also have positive effects on both targets can. In addition, a
closer link between the primary internal
Unternehmenssteue-tion (Managerial Accounting /
Economics) and the primary public finance allocated
approaches should be sought to explain the impact of
transfer pricing methods and regulatory measures on capital
investments.

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Knowledge of Theoretical Analysis" Weber Economics & Finances, Vol. 1 (2) 2015, Article ID wef_ 118 109-117, 2015


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