Tax-compliant transfer pricing and responsibility accounting
While the accounting literature has extensively studied the role of transfer pricing (TP) within the management control system (MCS) of companies, MCS issues related to cross-border transfers have received far less attention. In this case study, we investigate how TP tax compliance influences responsibility accounting when one multinational enterprise (MNE) uses a single set of transfer prices for both tax compliance and management control. First, the MNE eliminated TP negotiation, leading to psychologically disagreeable and sometimes also economically harmful situations. Second, the firm administratively simplified the determination of profit margins to such an extent that it could lead to suboptimal business decisions. Third, tax compliance induced a profit center designation for business units that were primarily responsible for costs or revenues. The firm first coped with a mixed treatment of these responsibility centers, allowing them to be profit centers for tax purposes and cost or revenue centers for MCS purposes. Later, top management became convinced of the benefits of a profit-center treatment for all purposes and started to convert the pro-forma profit centers into real profit centers. Overall, this study contributes to the stream of research documenting and explaining how MCSs are designed and used under environmental pressures.
international transfer pricing, management control system, responsibility accounting, multinational enterprise.
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