Governmental influences on multinational transfer pricing.

Multinational corporations' inter-affiliate sales represent nearly half of U.S. imports. This research hypothesizes that transnational transfer pricing decisions for these transactions reflect a multinational firm's complex dealings with the U.S. and foreign host governments. In addition to using transfer prices to reduce taxes and tariffs, firms might employ them to "hide" profits in politically sensitive arenas and circumvent exchange controls by "disguising" repatriation of funds. This study may be best motivated through two perspectives: (1) First, the issues examined here have considerable public policy significance. The GAO and others have claimed that corporate misuse of inter-affiliate accounting produces a substantial revenue loss. Both the UN and the Organisation for Economic Cooperation and Development have studied transfer pricing with the intent of curbing its alleged abuses. The IRS and foreign tax authorities are devoting increasing corporate audit resources to monitoring interaffiliate transactions. and in their Joint Senate-House Report on the 1986 Tax Act, Congress instructed the IRS to investigate these issues further. Yet, while a few case studies and surveys suggest the importance of taxes and other governmental policies in shaping transfer prices, there have been no large sample attempts to empirically analyze these influences. This seems a logical precedent to any major changes in the relevant tax and tariff laws. (2) This research may also be viewed as a compliment to the "Positive Theory" literature. It suggests that firms use transfer pricing to avoid governmental dividend restrictions on repatriation in much the same way they use accounting to reduce the restrictiveness of dividend limitations in bond covenants. It also provides, through an international cross-section, a test of Watts and Zimmerman's political cost hypothesis. The dissertation examines transfer prices on U.S. imports using 1981 data obtained from the Department of Commerce. Transfer price deviations from market prices are regressed against tax, tariff, exchange control and political risk independent variables. The robust results suggest that all these factors significantly affect transfer pricing decisions.PhDAccountingUniversity of Michiganhttp://deepblue.lib.umich.edu/bitstream/2027.42/162203/1/8920553.pd