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Summary papers MACSikka, P. & Willmott, H. (2010). The dark side of transfer pricing: Its role in tax avoidance
and wealth retentiveness. Critical Perspectives on Accounting, 21(4), 342-356
‘Transfer pricing’ is portrayed as a technique for optimal allocation of costs and revenues among divisions,
subsidiaries and joint ventures within a group of related entities.
Transfer pricing1 is of increasing importance to corporations as in a globalized economy their operations
extend to countries with diverse taxation regimes and regulatory capacities.
Experts acknowledge that transfer pricing can enable companies to avoid double taxation, but “it is also open
to abuse. It can be used to shift profits artificially from a high- to a low-tax jurisdiction, by maximizing expenses
in the former and income in the latter”
Transfer pricing practices matter to the state because they affect the taxes that it can levy upon corporate
profits to finance public goods and thereby secure legitimacy.
transfer pricing enables corporations to minimize tax payments by enabling capital to be exported to more
favorable locations.
The response of the price wedge to tax rates indicates that tax minimization may be an important part of
transfer pricing decisions with consequences for the level of corporate tax revenue and strategic responses to
changes in the tax code
APA permit corporations and domestic and foreign tax authorities to agree on transfer pricing methods in
advance of filing a tax return and thus avoiding considerable uncertainties and possible lawsuits.
In accordance with the logic of capitalism, the legal obligation of corporations is primarily to increase profits
and dividends for the benefit of their shareholders. Such priorities are enshrined in law.
an Ernst and Young argued that “Tax is a cost of doing business so, naturally, a good manager will try to
manage this cost and the risks associated with it”
Reducing or eliminating taxes is attractive to corporations as it boosts shareholder value, post-tax earnings and
returns to shareholders. It also increases company dividends and executive rewards as these are linked to
reported earnings.
Since the amount of tax payable is dependent on ‘costs’ and ‘income’, corporate attention becomes more
intently focused on ‘transfer pricing’ strategies. As a consequence of their implications for taxation, transfer
prices are significant not only for the evaluation of performance of corporate divisions, subunits, departments
and subsidiaries, but also for the taxes that domestic and foreign governments might be able to levy on
corporate profits to finance public goods and social investment.
Globalization has added new complexities to the politics of transfer pricing. Freed from the limitations of
territorial jurisdictions, corporations can more easily establish subsidiaries,10 affiliates, joint ventures, special
purpose entities and trusts in favorable geographical locations to take advantage of low taxes and subsidies.
The emergence of global production creates new and extensive opportunities for transfer pricing strategies by
enabling companies to shift profits to more desirable locations and thereby avoid taxes.
Developing countries are highly vulnerable to the use of transfer pricing for tax avoidance and flight of illicit
flight of capital but their ability to check aggressive practices is often handicapped by the lack of financial
resources and consequently the possibilities of hiring expert labor to scrutinize corporate practices more
closely.
,(IMF) states that globalization of trade creates “problems for national tax authorities deriving from the
potential use and abuse of “transfer prices” by the multinationals, including on loans, the allocation of fixed
costs, and the valuation of trademarks and patents.
Evidence suggests that “intrafirm trade prices appear to be influenced by the tax-minimization strategies of
multinational firms” and that there is a tendency for corporations to boost post-tax earnings by reporting
“higher taxable profits in countries where taxes are lower”.
Since joint ventures rely on purchase of components and technologies from parent companies, “foreign
investors intend to prolong the purchase period to maximize the profits generated from transfer pricing”.
More widely, transfer pricing has been used by multinational logging companies to avoid payment of taxes that
could otherwise provide citizens in developing countries with revenues vital for their economic development.
IRS stated that “taxpayers shift significant profits offshore by manipulating the price of related-party
transactions so that the income of an economic group is earned in low-tax or no-tax jurisdictions, rather than
the U.S., thus reducing the enterprise’s worldwide income tax liability.
The advantage is that subsidiaries and affiliates can claim tax relief on costs whilst the recipient pays little or no
tax on the income.
Companies do not necessarily have to transact internationally to develop transfer pricing policies for the use of
intellectual property.
Often the subsidiary companies do not produce anything tangible and have little or no staffing. Such activity
reduces the parent company’s income and tax in the place of its business, as the fee is a deductible business
expense.
Transfer pricing is not just an accounting technique, but also a method of resource allocation and avoidance of
taxes that affects distribution of income, wealth, risks and quality of life.
In more advanced economies, despite record profits, the tax revenues from corporate taxes as a percentage of
the GDP and effective tax rates have declined, and transfer pricing practices may provide a plausible
explanation for this decline.
“Intra-company pricing crosses the line from tax avoidance into outright tax evasion”.
Faced with corporate resistance some states may assign higher rates of taxes to wages, consumption, savings
and less mobile capital, which in turn can breed resentment and undermine the social legitimacy of the state.
Globalization has encouraged convergence around the arm’s length principle, but relatively few corporations
dominate global trade and independent prices for intermediate goods are not easy to formulate.
Transfer pricing practices, we have argued, merit close attention because they articulate competing claims on
economic surpluses in the shape of corporate earnings, rates of return, dividends, executive rewards, taxes,
social welfare rights and the ability of states to provide public goods.
Arm’s length standard has become administratively unworkable in its complexity. As a result, the arm’s length
standard rarely provides useful guidance regarding economic value”. In response, some US states have
implemented “formulary apportionment” where companies are taxed on the basis of their economic activity
and income within a particular geographic jurisdiction rather than arbitrary allocation of costs.
By routing paper transactions through tax havens or no/low-tax jurisdictions companies are not necessarily
engaging in any new production of goods or services, but such practices significantly change the economic
statistics used by governments to manage local economies.
,The use of transfer pricing to avoid taxes poses challenges to professional and corporate claims of acting as
socially responsible organizations.
Transfer pricing also provides a lens for studying the complex and contradictory relationship between the state
and corporations. The state is the ultimate guarantor of capitalism and supports capitalist enterprises not only
by bailing out distressed enterprises (e.g. banks) but by also providing social infrastructure, security, legal
system and social stability conducive to the production of economic surpluses.
Thus the politics of transfer pricing draw attention to the complex and contradictory role of the state and
corporations in the recurring crisis of capitalism.
, Ferreira, A. & Otley, D. (2009). The design and use of performance management systems:
an extended
framework for analysis. Management Accounting Research, 20(4), 263-282.
Anecdotal evidence suggests that the extended framework provides a useful research tool for those wishing to
study the design and operation of performance management systems by providing a template to help describe
the key aspects of such systems.
Therefore, we argue that research would benefit from a framework that provides a broad view of the key
aspects of a MCS and that allows researchers to obtain an holistic overview in as efficient way as possible.
We see performance management systems (PMSs) as including all aspects of organizational control, including
those included under the heading of management control systems.
MCSs have been conceptualized in various ways. The classic view, outlined in Anthony’s (1965) work, divided
the realm of control between strategic planning, management control, and operational control. He defined
management control as “the process by which managers assure that resources are obtained and used
effectively and efficiently in the accomplishment of the organization’s objectives”.
we view PMSs as the evolving formal and informal mechanisms, processes, systems, and networks used by
organizations for conveying the key objectives and goals elicited by management, for assisting
the strategic process and ongoing management through analysis, planning, measurement, control, rewarding,
and broadly managing performance, and for supporting and facilitating organizational learning and change.
The definition views the PMSs as performing a supporting role for a broad range of managerial activities,
including strategic processes — which involve strategic formulation and strategic implementation — and
ongoing management. Also, through its learning and change facilitation role, a PMS can support or foster
emergent strategies.
In essence, the framework of Otley highlights five central issues which he argues need to be considered as part
of the process of developing a coherent structure for performance management systems.
1. The first area addressed by his framework relates to the identification of the key organizational
objectives and the processes and methods involved in assessing the level of achievement in each of
these objectives.
2. The second area relates to the process of formulating and implementing strategies and plans, as well
as the performance mea- surement and evaluation processes associated with their implementation.
3. The third area relates the process of set- ting performance targets and the levels at which such targets
are set.
4. The fourth area draws attention to rewards systems used by organizations and to the implications of
achieving or failing to achieve performance targets.
5. The final key area concerns the types of information flows required to provide adequate monitoring of
performance and to support learning.
The framework proposed by Otley has a number of strengths:
1. First, it provides a helpful structure for analyzing MCS by focusing on five key areas. The framework
seems especially useful for this purpose because it considers the operation of the MCS as a whole and
because it can be used with both for-profit and not-for-profit organizations. This contrasts with other
frameworks, such as value based management frameworks which focus only on for-profit entities.
Stringer (2007) maintains that the main strength is the breath of performance issues it includes and its
integrated nature.
2. Second, the general nature of the framework enables other frameworks to be used to complement its
interpretations and insights, as shown by the Tuomela (2005) and Ferreira (2002) studies.
3. Third, its application has been reported to be straightforward, the areas to be addressed are clear and
unambiguous, and the questions asked to appear meaningful at different levels of management.
4. Finally, the framework facilitates the process of dealing with data, a particularly important aspect
given the difficulty of dealing with large amounts of information in case-based research
In particular, the framework encourages an overview of all control mechanisms in use to be taken.
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