Brand Proliferation and Multinational Transfer Pricing

Transfer pricing can be used as a strategic instrument to accomplish those objectives that enterprises pursue within the context of multi-divisional organization. This paper analyses the use of transfer pricing for decentralized multinational enterprises (MNEs) as a strategic instrument to tackle the issues of brand proliferation. The centralized headquarters ’ prior action on setting transfer pricing is to backup the decentralized subsidiaries in their output decision- making. It shows that the higher transfer pricing has enabled easier collusion amongst the brand’s agencies in developing an intra-brand competition model. With regard to the level of transfer pricing, this hinges upon the strength of intra-brand competition and inter-brand competition which are expressed in opposite direction. It also demonstrates that the optimal transfer pricing is affected by any difference in tax rates between two countries. (In the case where tax rates are the same, there is no effect on transfer pricing strategy). With the rapid growth of multinational enterprises (MNEs), the pricing of internal transactions undertaken by MNE’s headquarters is a tax issue that tax authorities are concerned about but it is also a strategic concern of MNE in supporting its local subsidiaries in brand proliferation and output decision, as the MNEs have the incentive to manipulate their transfer prices in order to shift profit “cross-border”, so that they may minimize their tax burden. Ramy Elitzur and Jack Mintz (1996) discussed corporate tax competition that is subject to a transfer pricing rule, and argued that tax will be reduced when harmonization is taken into consideration