Impact of transfer pricing methods for tax purposes on supply chain performance under demand uncertainty

Huh, Woonghee Tim; Park, Kun Soo

doi:10.1002/nav.21533

Cited by 63 publications

(22 citation statements)

References 47 publications

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“…The transfer pricing model assumes a fixed transfer price. This is commonly seen in the literature and in practice (Cohen and Lee 1989, Huh and Park 2013, Shunko et al 2014. It is well known that transfer pricing is a powerful cash redistribution mechanism for multinationals.…”

Section: Introductionmentioning

confidence: 67%

Joint Inventory and Cash Management for Multidivisional Supply Chains

Luo

Shang

2015

Operations Research

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This paper develops a centralized supply chain model that integrates material flows with cash flows. The supply chain is owned by a single firm with two divisions. The downstream division (headquarters), facing random customer demand, replenishes materials from the upstream division. The firm installs a financial services platform that pools the divisions' cash into a master account managed by the headquarters. In each period, cash is received from customers and paid to the outside vendor after materials are delivered. The headquarters determines how much cash to retain for inventory replenishment. The objective is to determine an optimal joint inventory replenishment and cash retention policy for the entire supply chain. We prove that the optimal policy has a surprisingly simple structure-both divisions implement a base-stock policy for inventory replenishment; the headquarters monitors the corporate working capital and implements a two-threshold policy for cash retention. This result is obtained by extending the well-known Clark-Scarf decomposition with newly derived cash-related penalty functions. The optimal policy enables us to investigate the interaction between cash and inventory decisions. We show that in the presence of transaction costs, a firm may stock more even if the inventory holding cost increases. To quantify the value of financial integration, we compare the cash pooling model with systems under different levels of financial integration. Our study suggests that the value of cash pooling can be significant when demand is increasing (respectively, stationary) and the internal transfer price is low (respectively, high). Nevertheless, a significant amount of cash pooling benefit may be recovered if the headquarters can optimize the internal transfer price.

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Section: Introductionmentioning

confidence: 67%

Joint Inventory and Cash Management for Multidivisional Supply Chains

Luo

Shang

2015

Operations Research

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“…Such transfer prices are regulated by pre-specified schemes (e.g., Section 482 of the Internal Revenue Service Tax Code specifies six different methods) that are guided by the arm's length standard. Researchers (e.g., Halperin and Srinidhi 1991, Huh and Park 2013, Villegas and Ouenniche 2008 have studied how these different methods affect the decisions of a multinational firm (MNF). Related to our work, Shunko et al (2014) integrate sourcing (choosing between an offshore subsidiary and an external manufacturer) and transfer pricing decisions for a MNF using a "make versus buy" type of decision model.…”

Section: Related Literaturementioning

confidence: 99%

Sourcing and Procurement Cost Allocation in Multi‐Division Firms

Fang

Natarajan

2020

Production and Operations Management

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Through Central Procurement Organizations (CPOs), large firms with multiple divisions have begun adopting a center‐led sourcing approach that allows firms to centralize strategic sourcing activities, while permitting decentralized execution by divisions, allowing the firm to leverage large purchase volumes with vendors. This new center‐led procurement environment has brought a new decision requirement: How should a CPO select vendors for each division's requirements to minimize the firm's total procurement cost and simultaneously develop a fair and alignment‐inducing mechanism to allocate the costs (and savings) of company‐wide procurement to the divisions? Past research and current practice have not addressed this linkage between vendor selection and cost allocation in multi‐division firms. This work models this sourcing and procurement cost allocation (SPC) problem facing CPOs of large firms as a mixed‐integer optimization problem. This model is flexible and can incorporate several commonly‐used cost allocation rules. We show that the SPC problem is NP‐hard. Therefore, to support practical decision‐making in this context, we develop a tailored solution approach for the SPC problem. Our approach enhances the base model by adding strong valid inequalities. We tested our model and its enhancements in an extensive numerical study, solving over 160 instances. Results reveal that (a) the CPO can ensure fair cost allocation at a modest cost (relative to the centralized solution) with our model, and (b) the proposed tailored approach is effective and necessary in solving a wide variety of instances.

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“…They investigate the impact of China's export‐oriented tax and tariff policies on the firm's preference over export–import and bonded‐import strategies. Considering two widely used transfer pricing methods (e.g., cost‐plus method and resale‐price method), Huh and Park () study the effects of tax on an MNF's global supply chain management, where the MNF's subdivisions are located in different countries with different tax rates. Shunko et al.…”

Section: Literature Reviewmentioning

confidence: 99%

Quality spillover, tariff, and multinational firms' local sourcing strategies

Niu

Chen

2018

Int Trans Operational Res

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It is prevalent for multinational firms (MNFs) to enter a market by importing products of superior quality, and then engage in local competition with domestic manufacturers (DMs). Alternatively, many MNFs voluntarily expose themselves to the risk of quality spillover by strategically sourcing from DMs to avoid the tariff burden. In this paper, we consider a DM and an MNF that strategically choose whether to source from the DM, and characterize the tradeoff between the tariff burden and the potential loss due to quality spillover. We analyze the supply chain parties' preferences over the MNF's sourcing strategies and the impact of the government's tariff regulation. We show that the MNF prefers domestic sourcing (DS) when the risk of quality spillover is low, while the manufacturer usually sees an opposite preference. However, we find that there exists a win‐win zone where both MNF and DM prefer the MNF's domestic sourcing simultaneously. From the government's perspective, DS always results in more output of high‐quality products, and more social welfare when quality spillover is sufficiently valuable. Interestingly, we find that, even if the quality spillover is limited, more social welfare can be obtained under DS, if the tariff rate is either low or high. The government is hence able to facilitate the incentive alignment between the MNF and the DM by adjusting the tariff regulation, which improves product quality and social welfare in the domestic market, although there exist some danger zones where the regulation is inefficient.

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Impact of transfer pricing methods for tax purposes on supply chain performance under demand uncertainty

Cited by 63 publications

References 47 publications

Joint Inventory and Cash Management for Multidivisional Supply Chains

Joint Inventory and Cash Management for Multidivisional Supply Chains

Sourcing and Procurement Cost Allocation in Multi‐Division Firms

Quality spillover, tariff, and multinational firms' local sourcing strategies

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