The Impact of Tax and Transfer Pricing on a Multinational Firm's Strategic Decision of Selling to a Rival

Abstract

W e consider an integrated multinational firm (MNF) who produces a product in a low-tax country and sells it in a high-tax country. The global firm faces the decision of whether to sell the product (and at what price) to an external rival in the retail market who has an alternative outside sourcing option. Using a Cournot competition model, we show that two salient elements of the global tax planning-namely the tax rate disparity and the regulatory restrictions on transfer pricing between the MNF's low-tax and high-tax divisions-have significant impacts on the MNF's decision of selling to the rival. We find that when the tax rate disparity is low, the MNF will sell, but only to a low-cost rival, a result that is in-line with the traditional understanding in a tax-free setting. However, when the tax rate disparity is high, the outcome of selling or not reverses: the MNF will sell only to a high-cost rival. We also find that under the requirement of minimum order quantity, the MNF may sell to the rival at a price even higher than the latter's alternative sourcing cost. Another interesting finding of our analysis is that the regulatory restriction on transfer pricing may bring benefit rather than burden to the global firm.

Horizontal outsourcing and price competition: The role of sole sourcing commitment

“…They assume that firms set a price before making production/ordering decisions, and investigate the firms' preferences on the leadership in setting prices. Recently, Niu et al (2019) and Hsu et al (2019) identify supply uncertainty and cross-broader taxation as the potential drivers to explain the selling-to-rival business practices, respectively.…”

Metode Transfer Pricing: Hierarchy Atau the Most Appropriate?

“…Perusahaan dapat menggunakan berbagai pendekatan transaksi untuk mencapai tujuan dimaksud misalnya melalui pembelian atau penjualan barang baik berwujud maupun tidak berwujud. Transaksi lainnya dapat berupa pembayaran bunga pinjaman, royalti, jasa, dan sebagainya (Hsu et al, 2019;Clempner & Poznyak, 2019) .…”

“…OECD sendiri menganjurkan negara-negara anggotanya untuk menggunakan pendekatan ALP (Rossing et al, 2017). Kebanyakan Negara menggunakan ALP karena dianggap lebih praktis untuk diaplikasikan dan berterima umum serta efektif untuk mencegah penghindaran pajak (Nguyen, 2019;Amidu et al, 2019;Challoumis, 2019;Choi, et al, 2020;Clempner & Poznyak, 2018;Hsu et al, 2019;Juranek et al, 2017;Kakana, 2020;Picciotto, 2020). Nguyen (2019) membagi metode transfer pricing ke dalam dua klasifikasi, yaitu metode tradisional (traditional method) dan metode laba (profit method).…”

Inventory financing under Risk‐Adjusted‐Return‐On‐Capital criterion

“…Under the Pareto dominant loan terms, we establish the RAROC criterion and regulatory capital requirement as a form of financial friction that links the firm's financial situation and operational decisions under the classic Modigiliani-Miller framework. In this aspect, our article is related to those that examine firms' optimal operational decisions in the presence of various forms of financial market frictions, such as cost of financial distress (Boyabatl𝚤 & Toktay, 2011;Kouvelis & Zhao, 2011;Yang & Birge, 2018), tax (Chod & Zhou, 2013;Hsu et al, 2019;Xiao et al, 2015;Xu et al, 2018), information asymmetry (Alan & Gaur, 2018;Cai et al, 2014;Lai & Xiao, 2018;Ning & Babich, 2018;Tang et al, 2018;Zhao et al, 2019), bank's market power (Buzacott & Zhang, 2004;Dada & Hu, 2008), and transaction cost (Hu et al, 2018;Tanrisever et al, 2018;Tanr𝚤sever et al, 2012;Yang et al, 2015). Our article complements the above ones by introducing RAROC and regulatory capital as a source of financial friction, and quantifying its impact on firms' inventory decisions in a unique fashion.…”