The use of interdivisional transfer pricing : a case study

Abstract

The way companies are managed and organised certainly has an impact on their success and extent of growth. One of the organisational structures which enables such an accomplishment is the divisional form. This structure might consequently result in trade between companies forming part of the same group. Ultimately, the way companies deal with these sales have an impact on the level of performance of the parent and the subsidiary companies. For this reason the aim of this study was to examine the transfer pricing issues within a local group of companies. Such an aim was achieved by examining the levels of divisionalisation and decentralisation of the group, by exploring the current transfer pricing practices adopted and by investigating whether the practices adopted by the case reflect the literature. In this case study face-to-face interviews and email interviews were used for collecting data. The views of the group financial controller, the managing directors of the companies involved in internal trade and the accountants of these same companies were deemed necessary. Thus these were the persons from whom data was collected. The study revealed that minimal decentralisation is practised within the group and although a transfer pricing policy is not formalised some of the objectives and methods recognised in the literature are still adopted. Such objectives include performance evaluation and goal congruence. With regards to methods used, the main method recognised was the negotiation based. Finally, the researcher was able to recommend any areas for improvement within the group, including the recommendation of formalising a transfer pricing policy.