Transfer Pricing

A cool article on transfer pricing--no it is not an oxymoron!

Reichelstein, Baldenius, and Melumad look at transfer prices and remind us that transfer pricing, the price that firms charge for internal "purchases", is a balancing act between tax reduction strategies, internal controls, and incentives.

“What most people think about is transfer pricing as a tax optimization issue,” Reichelstein says. “Yet, transfer prices are management tools. They have an important function to facilitate decision-making, to tell certain regional or country managers what the value or price of some intermediate product is and use that information to maximize the profit of the company as a whole. That is the economic function of transfer pricing.”"

"The separate worlds of tax folk and management planning types “even splits the accountants,” he notes, and creates separate industries. “The tax accountants look on pricing as entirely a compliance issue,” he says. Meanwhile, management accounting consultants are preoccupied with transfer prices for both internal allocations and public reporting purposes."

Very interesting! However, I am a bit less convinced that a weighted average solution is optimal, but hey, that is rather insignificant in the big picture.

Thanks to MBA Depot for pointing this one out to me!