Environmental factors affecting the international transfer pricing decisions of multinational enterprises : a foreign-controlled versus UK-controlled companies’ comparison

Abstract

A number of environmental factors influence the International Transfer Pricing decision processes of multinational enterprises (MNEs). The extent to which each of these factors affect the process depends on management’s perception of its relative importance. While a number of studies have examined the relative importance of the environmental factors affecting the international transfer pricing practices of homogenous groups of multinational enterprises, these studies have not distinguished between the factors as they affect foreign controlled firms and locally controlled ones. This study examines the relative importance of seventeen environmental factors by foreign controlled multinational enterprises and United Kingdom controlled ones. Data was collected by means of questionnaires administered on 300 UK based companies, half of which are foreign controlled. The results indicate similar rank ordering of the seventeen environmental factors when taken as a whole. However, when the factors were layered into three distinct classes of income shifting, internal operations and economics related, the two groups of firms were found to be similar in their rank ordering of income shifting related factors. Their ranking of internal operations and economics related factors was, however, dissimilar. On individual factor level, significant differences were found in the way five environmental factors are ranked by members of the two groups. The findings of the study show that the location of control of UK based multinational enterprises influenced rating of environmental factors. There are possible implications for designers of international transfer pricing systems, managers of multinational enterprises and regulators of international tranfer pricing practices.