1. ACCY 913 Management
Accounting Presentation
Week 3: Divisional Performance
Measurement & Transfer Pricing
Group1:
Rebecca Ma
Chenge Xu
Sophie Zhao
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2. The MNE Perspective
1. Concentration of cash centrally;
2. Minimisation of global tax liability, including customs
and excise taxes;
3. avoidance of repatriation of dividends restrictions;
4. Reduced exposure to risks of inflation and exchange
rate fluctuations;
5. Improved competitive advantage by providing “cheap”
finance;
6. Management of joint ventures involving foreign
partners;
7. Maintaining good relations with host countries and
the public in genera;
8. Provision of relevant performance measures for
segments of the enterprise
(Daniels, Ogram and Radebaugh, 1976)
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3. Arm’s Length Principle
Arm’s length principle means that intra-firm transactions should be
treated and priced as if they were undertaken under open market
conditions under similar circumstances (OECD 1995).
OECD Guidelines recognize five TP methods that,
1. the comparable uncontrolled prince,
2. the cost-plus methods,
3. the resale-minus methods
4. the transactional net margin or comparable profit methods,
5. the profit split method
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4. the Importance of Tax Compliance
Transfer Pricing
• Management Control Goal VS Tax
Compliance Objectives
• Tax compliance objective is
central to this study
• Traditional role of TP: achieving
goal congruence, measuring and
evaluating managerial
performance
• The trends of Tax compliance
• Pressure MNEs face today
• Tax compliance model (Kabera,
2008)
http://www.memoireonline.com/05/10/3488/m_A-Critical-Analysis-of-Effectiveness-of-Tax-Offences-Control-Mechanisms-Under-Rwandan-Law25.html
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5. Contingency School of Research
• Contingency Approach of management:
https://www.youtube.com/watch?v=6yBU76tDk18
• Trade-offs between Tax compliance and MCS objectives of TP
• Three questions before building up TP models
1. whether transfer price should be one or two?
2. tax compliance: a given constraint or a decision variable?
3. performance measurements or profit?
• Identification of Responsibility Accounting
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6. Division chosen for study
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7. Changes in Setting Transfer Prices
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8. Why Balanced Scorecard?
Financial Measures are, and always will be important, but they
must be supplemented with other indicators that predict future
financial success.(Niven,P.R.,2005, p13)
• First, they provide differential and more in-depth information compared to
that of traditional financial metrics.
• Second, they are more forward-looking and capture key drivers of
performance.
• Third, they attract the attention of a wide set of managers who can engage in
fruitful discussions to analyse the organisational
performance.(Dossi,A&Patelli,L,2010,p517)
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9. Influences of TP Tax Compliance on
Responsibility Accounting
• Elimination of negotiation in TP
• Uniform profit margins/ mark-ups
• Mixed responsibility centre treatment
• Conversion of mixed responsibility centres into
real profit centres
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10. References:
• Brown,M.G.(2007) Beyond The Balanced Scorecard, Improving Business Intelligence With Analytics, New York: Productivity
Press.
• Cools, M. and Slagmulder R. (2009), “Tax-Compliant Transfer and Responsibility Accounting”, Journal of Management
Accounting Research, Vol. 21, pp 151-178
• Daniels, J.D., Ograms, E. W. and Radebaugh, L. (1976) Multinational business, environments and Operations, Wokingham:
Addison-Wesley.
• Dossi,A& Patelli,L(2010), ”You learn from what you measure: financial and non-financial performance measures in
multinational companies”, Long Range Planning, vol.43, pp.498-526.
• http://www.memoireonline.com/05/10/3488/m_A-Critical-Analysis-of-Effectiveness-of-Tax-Offences-Control-Mechanisms-
Under-Rwandan-Law25.html
• http://www.oxfordreference.com.ezproxy.uow.edu.au/view/10.1093/acref/9780199563050.001.0001/acref-
9780199563050-e-2860?rskey=CYv7LL&result=1
• Mays, R. L. Jr, 1982, “Divisional Performance Measurement and Transfer Prices: to measure divisional performance
accurately, we must isolate the “bias” of transfer prices, whether established by negotiation or management fiat”,
Management Accounting, ISSN 00251690, Vol. 63, Issue 10, pp 20-25
• Niven,P.R.(2005) Balanced Scorecard Diagnostics: Maintaining Maximum Performance, New Jersey: John Wiley & Sons.
• Outley, D. (1999), “performance Management: a framework for management control system research”, Management
Accounting Research, Vol.10, pp.363-382 10