A general unconstrained model for transfer pricing in multinational supply chains

F. Villegas-Moran, J. Ouenniche

Research output: Contribution to journalArticlepeer-review

Abstract

Multinational supply chains operate in more than one country or tax jurisdiction and face decision problems concerned with trade flows of resources, products and services, transfer prices, and allocation of transport costs between their divisions. These decisions must consider, for the sake of optimality, corporate and governmental parameters such as the payment of dividends and royalties, ownership of and control over subsidiaries, income taxes differentials, duties and quotas, etc. In this paper, we generalize and extend the Theory of the Multinational Firm to the case of multinational supply chains. We propose a model that is more general and comprehensive than the previous ones proposed in the literature. To be more specific, our model integrates many of the previous research factors and includes new ones, such as transport costs and duty drawbacks, which are critical for supply chains that operate under international trade regulations. Under the maximization of the repatriated earnings objective, we study the optimality conditions of the corporate decision variables to derive managerial guidelines and to determine how decisions regarding trade quantities, transfer prices, and transport cost allocations affect the amount of taxes to be paid to host governments as well as the total after tax repatriated earnings of the corporation.
Original languageEnglish
Pages (from-to)829-856
Number of pages28
JournalEuropean Journal of Operational Research
Volume187
Issue number3
Early online date29 Nov 2006
DOIs
Publication statusPublished - 16 Jun 2008

Keywords

  • Multinational supply chains
  • International trade
  • Transfer prices
  • Transport costs
  • Repatriated earnings

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