Dynamic Adjustments in Transfer Pricing Agreements

Broomhall, David
April 2007
Business Economics;Apr2007, Vol. 42 Issue 2, p22
Academic Journal
This paper examines the issue of using past economic performance to benchmark transfer prices in advance pricing agreements (APAs) and explores methods that allow transfer prices to reflect current economic performance. The paper applies these methods to the electronics industry and finds that capacity utilization provides a much better proxy for current economic performance than does the typical interquartile range of profits of comparable companies generated over some historic interval prior to the APA. While taxpayers who benchmark results on capacity utilization lose the certainty of a fixed range, they gain by allowing transfer prices to reflect changing economic conditions.


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