A study of the determinants of transfer pricing. The evaluation of the relationship between a number of company variables and transfer pricing methods used by UK companies in domestic and international markets

Abstract

The transfer pricing, literature indicates that an investigation of some aspects of this subject could usefully be undertaken in order to contribute to the understanding of transfer pricing in both domestic and international markets. This study aims at exploring the current state of transfer pricing practice and establishing the importance attached to the ranking of transfer pricing determinants (i. e. objectives and environmental variables) and the extent to which the ranking varies across markets, industry, and according to the transfer pricing method used. It also seeks to discover interrelationship among the transfer pricing determinants in order to produce a reduced set of basic factors. Lastly, it aims at evaluating the relationship between transfer pricing determinants and transfer pricing methods and at discovering a means of predicting the latter from the company's perception of the relative importance of these determinants. To achieve the above objectives, an empirical study covering both domestic and international markets was undertaken in UK companies. The conclusions are concerned with transfer pricing policy, methods currently used, and problems apparent in practice. The overall ranking-by survey respondents of the transfer pricing determinants is given as well as the results of tests of certain hypotheses which relate to this ranking. The transfer pricing determinants used in the survey for domestic and international. markets (twelve and twenty respectively) have been reduced by Factor Analysis to four and six factors. The study made use of the results to obtain measures of the ranking of discovered factors. Finally, the relationship between the transfer pricing determinants and transfer pricing methods was quantitatively evaluated in the form of a set of classification functions by using Multi-Discriminant Analysis. The classification functions are able to predict the transfer pricing method actually used in companies with an acceptable degree of success. The study's results have been reviewed with a small number of senior managers who are involved in establishing transfer pricing policy within their companies.