Transfer Pricing and Sourcing Strategies for Multinational Firms

Shunko, Masha; Debo, Laurens G.; Gavirneni, Srinagesh

doi:10.1111/poms.12175

Cited by 75 publications

(47 citation statements)

References 30 publications

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“…This is consistent with Shunko et al. () and Wu and Lu () who assume that the transfer price should be between the upstream production cost and an exogenous upper bound. In practice, the upper bound might be related to the MNF's upstream production cost.…”

Section: Other Considerationssupporting

confidence: 90%

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

Hsu

Xiao

2019

Production and Operations Management

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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.

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Section: Other Considerationssupporting

confidence: 90%

“…Our assumption on the transfer price without selling to the rival later in our extension (i.e., the transfer price should be less than an upper bound T ) is consistent with Shunko et al. () and Wu and Lu ().…”

Section: The Modelsupporting

confidence: 87%

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

Hsu

Xiao

2019

Production and Operations Management

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“…Shunko et al. () characterize the tradeoff between the incentive role and tax role of the transfer pricing, and investigate its impact on MNFs' sourcing strategies. 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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“…Cohen and Mallik (1997) note the potential benefits of incorporating tax considerations into supply chain decisions. However, much of the work on this topic has focused on multinational enterprises and the issue of transfer pricing; see, for example, Huh and Park (2013), Shunko and Gavirneni (2007), Shunko et al (2014), Xiao et al (2015). The issue of charitable donation is largely ignored in the literature.…”

Section: Literature Reviewmentioning

confidence: 99%

Optimal Pricing and Inventory Planning with Charitable Donations

Chu

Rusmevichientong

2018

M&SOM

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This paper investigates firms' optimal operational decisions and after-tax profits with regard to tax deduction for charitable donations. Motivated by the steady growth in non-cash donations from U.S. companies, our work is the first to provide theoretical guidance on operational planning under tax deduction for both pre-committed donations and end-of-season donations. We analyze the impact of tax deduction for a profitdriven firm under a two-period price-markdown newsvendor model and characterize the firm's optimal price and quantity decisions. The firm's optimal donation behavior is driven by two factors: fixed cost and demand uncertainty. Specifically, a positive fixed cost can induce pre-committed donation during the regular selling season, and demand uncertainty can induce end-of-season donation during the clearance period. The enhanced tax deduction that is designed to encourage charitable donations results in unexpected behavior by the firm. For example, the firm's optimal clearance price can increase with the amount of leftover inventory, and the firm's optimal after-tax profit can increase as the tax rate increases. While the value of the deduction is tied to the fair market value (and the price) of the product, surprisingly, the firm may find it more profitable to charge a lower price, because the lower price may scale up the demand uncertainty and consequently increase the expected tax subsidy under the enhanced tax deduction. Our analysis reveals important insights about the impact of the tax law on a monopolist's optimal operational decisions and profit.

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Transfer Pricing and Sourcing Strategies for Multinational Firms

Cited by 75 publications

References 30 publications

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

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

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

Optimal Pricing and Inventory Planning with Charitable Donations

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