Transfer Pricing in International Business: A Management Tool for Adding Value

The increasing economic, social and political importance of trade in the modern era spawned a phenomenon called the multinational organization. These organizations, beginning with the Dutch East India Company, are capable of exercising extreme power not only in individual countries but globally. Countries, and often sub-national regions, compete vigorously against one another for the establishment of facilities for a multinational organization for they bring revenue, employment and economic activity.

The only significant problem is that these organizations have a national home to where profits ultimately will have to come. In trying to bring the maximum amount of profit home, multinational organizations often engage in practices, particularly in relation to internal pricing, that frequently enrage either their host or home countries. These internal pricing activities, known more commonly as transfer pricing, have provoked reactions from national jurisdictions to monitor and modify the internal pricing activities of multinational organizations in ways that protect their revenue streams. This discord is so intense at times that it has caused managers to take their eye off the reason they are in business in the first place. Transfer pricing is not simply about maximizing revenue. It is a much more important management issue that treated unwisely or with ignorance, is likely to lead to an incongruity in the added value of products and services as well as the crucial return on capital employed.

This book seeks to remind managers of those important issues and how easy it is to create friction between the interested parties if the pricing process is not properly thought out. It goes on to provide an insight into how such conflicts can be assuaged or avoided altogether and explains how transfer pricing may become a managerial tool by establishing a common language that may be used as one driver for creating added value throughout the organization.