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Transfer Pricing and Financial Reporting

In: Business and Management

Submitted By HUDscholar
Words 3451
Pages 14
Transfer Pricing and Financial Reporting: some thoughts

Messaoud Mehafdi

This essay deals with the perennial transfer pricing (TP) puzzle and calls for the disclosure of TP information as a way of unravelling the puzzle in the new age of corporate governance and financial reporting transparency. Seen as a by-product of "managerial ambiguity by design" in large companies and labelled as a "perennial puzzle" , TP has over the years lived up to this cliché by creating complex management and tax problems with tremendous implications for supply chains and business ethics. TP is an increasingly dominant aspect of international production and exchange of goods and services and, in addition to the continuously changing arm's length regulations, interest in the public disclosure of TP information has been gaining momentum.

TP is a multifaceted global business reality that arises from intra-firm trade of tangible and intangible products across the industrial spectrum, usually in large vertically integrated companies. For many transnational companies (TNCs), the inseparable twins of intra-firm trade and TP are a prized business and financial conduit, accounting for around 60% or $1.6 trillion of global trade. Intra-firm transfers are very significant in the global service sector in general and the financial sector in particular where they are the focus of new regulation. TP is therefore a key factor in creating complex supply chains and, in order to engage investor confidence in the knowledge-based business environment, the sacrosanct touchstone of transparency should extend to the now globally important TP information. The need to revamp financial reporting to align it with the information requirements of the ‘new economy’ is well documented. However, TP is probably the least transparent item in published financial reports as relevant information is systematically withheld…...

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