Factors motivating transfer pricing choices of Japanese and United States transnational corporations

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Contrary to prior findings, Japanese transnational corporations (TNCs) seem to have changed their preferences for international transfer pricing methods from cost-based to market-based and negotiated methods. Use of negotiated methods is supported by the Japanese preference for collectivism and consensus.

The significant risk of an audit of U.S. TNCs by both the U.S. Internal Revenue Service and the Japanese National Tax Administration is at odds with both tax authorities' official policies, which theoretically accord cost-based methods equal standing with market methods. In practice, however, cost-based methods trigger IRS audits more than twice as often as other methods, suggesting that the IRS acceptance o f the “best method” in reality is acceptance of market methods and negotiated methods based on market prices.

Japanese TNCs consider segment profit to be more important than all other measures when evaluating managers, regardless of station. When choosing a pricing method, performance evaluation concerns are significantly more important to Japanese TNCs than to U.S. TNCs. U.S. TNCs employ various practices to counter the internal distorting effects of transfer pricing practices but use pricing transfer methods that provide distorted results and increase audit risk. Finally, it appears that effective, rather than statutory tax rates, might guide TNC behavior on income shifting. Increased disclosure seems necessary to deter these and other transfer pricing manipulations.






This article is the authors' final published version in Journal of International Accounting, Auditing and Taxation, Volume 6, Issue 1, 1997, Pages 25-47.

The published version is available at https://doi.org/10.1016/S1061-9518(97)90011-2. Copyright © Elsevier Inc.