Choosing a transfer pricing method: A study of the domestic and international decision-making process

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Multinational corporations (MNCs) often transfer goods between the parent and its domestic and/or international subsidiaries. Theoretically, the objectives and the choice of a domestic transfer pricing method are determined separately from the objectives and choice of an international method. How an individual MNC actually chooses methods when it has both types of transfers has not been investigated. In the present research, the factors affecting the domestic and international transfer pricing decision-making process and the objectives of transfer pricing methods in MNCs are investigated using both full-sample and matched-pairs analyses.

This research identifies differences in some of the organizational and environmental characteristics affecting the decision-making process regarding transfer pricing. However, in a matched pairs sample, transfer pricing choices do not reflect these differences. Most MNCs choose the same transfer pricing method for both domestic and international transfers, seemingly disregarding these differences and IRC Sec. 482 regulations. Many objectives of trasnsfer pricing are similar for both domestic and international transfers, contradicting prior research. There are significant differences in the importance of the criteria defining performance evaluation for domestic and international managers.

A third analysis compares companies by method chosen, disregarding the nature of the transfer. Findings suggest that the choice of a transfer pricing method is indeed contingent upon specific organizational and environmental characteristics, but not upon the nature of the transfer. In many cases, the domestic or international aspect of the transfer is secondary to other factors.






This article is the authors' final published version in Journal of International Accounting, Auditing and Taxation, Volume 1, Issue 1, 1992, Pages 33-49.

The published version is available at https://doi.org/10.1016/1061-9518(92)90005-Z. Copyright © Elsevier Inc.