International Transfer Pricing and Management Controls: A Post-BEPS Case Study

Abstract

This paper sets out to study the impact of increased transfer-pricing (TP) related tax risks on the management control system (MSC) and management control practices in a multinational enterprise (MNE). Such tax risks increased in response to stricter international TP regulation following the launch of OECD’s Base Erosion and Profit Shifting (BEPS) programme in 2013. Our study responds to Wagenhofer’s (2016) call for research on how regulation affects company behaviour. Prior case studies examining the link between an MNE’s international TP policy and the design and use of MCS (e.g. Borkowski, 2008, 2010; Cools et al., 2008; Cools and Slagmulder, 2009; Plesner Rossing and Rhode, 2010 and Plesner Rossing, 2013), are all based on data collected before the BEPS programme was introduced. Through a “control package versus control system debate” lens in combination with Malmi and Brown’s (2008) control typology, we investigate with the use of case data from a global multinational with sales in more than 150 countries, how an MNE adapts its controls in reaction to the promulgation of BEPS. We observe that in the years following BEPS, over the years a control package came to existence, which consists of two individual internally coherent and consistent management control systems each focusing on the guidance, evaluation and rewarding of a different set of firm objectives, namely on the one hand a decentralised system focusing on profit management along the value chain ( profit management) and on the other hand a centralised system focusing on profit allocation over the value chain (tax compliance). This control package is not adopted at one point in time, it evolved over time absorbing the knock-on effects of one set of controls on another set of controls, finally leading to what seems for now a “balanced” situation. Moreover this control package consisting of two individual MCS requires a double attention span for operational managers. In comparison to case studies, conducted prior to BEPS, we observe a horizontal organization of tax compliance in that the Corporate Tax department decides on the transfer pricing strategy and the design of the related transfer pricing controls, but the implementation of the policy is delegated to the operational managers.

Biography

Niclas Hellman is an Associate Professor in accounting and managerial finance at the Stockholm School of Economics and is presently engaged in research projects within the areas of IFRS adoption, financial reporting in extractive industries, international transfer pricing, financial analysts’ evaluations of corporate acquisitions, and accounting for business combinations.

For more information, or a copy of the work-in-progess paper,  please contact:
Dr Majid Abdi
E majid.abdi@sydney.edu.au
T 8627 6573