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2 - The transfer pricing problem

from Part I - The context of transfer pricing disputes

Published online by Cambridge University Press:  05 November 2014

By
Eduardo Baistrocchi
Edited by
Eduardo Baistrocchi  and
Ian Roxan
Eduardo Baistrocchi
Affiliation:
London School of Economics and Political Science
Ian Roxan
Affiliation:
London School of Economics and Political Science
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Summary

Introduction

Imagine the following scenario. A French multinational (FM) manufactures cars in France and owns a valuable intangible: the specific industry know-how in marketing its cars. FM is willing to expand its business to country X, where intellectual property rights are not properly enforced. In order to minimise the transaction costs in safeguarding the rights, FM decides to create a wholly-owned subsidiary in X which will be in charge of selling its vehicles (FM Sub.), instead of supplying its intangible know-how to an independent reseller in country X (Indep Co.). This strategy allows FM to expand its business to country X, minimising the risk of compromising its intangible via internalisation of these transactions costs.

This example shows that FM is able to replace the FM–Indep Co. relationship with the FM–FM Sub. model. More generally, this way, multinational enterprises (MNEs) are able to replace the arm's length market (the external market) for products and services with an internal market of inputs.

Type
Chapter
Information
Resolving Transfer Pricing Disputes
A Global Analysis
 , pp. 10 - 24
Publisher: Cambridge University Press
Print publication year: 2012

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