Management Control in the Transfer Pricing Tax Compliant Multinational Enterprise

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Accounting, Organizations and Society 33 (2008) 603–628 www.elsevier.com/locate/aos

Management control in the transfer pricing tax compliant multinational enterprise

Martine Cools

a

a,*

, Clive Emmanuel b, Ann Jorissen

c

Lessius University College (Association KU Leuven) & Rotterdam School of Management, Lessius, Korte Nieuwstraat 33, 2000 Antwerpen, Belgium b University of Glasgow, 65 Southpark Avenue, Glasgow G12 8 LE, United Kingdom c University of Antwerp, Prinsstraat 13, 2000 Antwerpen, Belgium

Abstract This paper studies the impact of transfer pricing tax compliance on management control system (MCS) design and use within one multinational enterprise (MNE) which employed the same transfer prices for tax compliance and internal management purposes. Our analysis shows immediate effects of tax compliance on the design of organising controls with subsequent effects on planning, evaluating and rewarding controls which reveal a more coercive use of the MCS overall. We argue that modifications to the MCS cannot be understood without an appreciation of the MNEs’ fiscal transfer pricing compliance process. Ó 2007 Elsevier Ltd. All rights reserved.

Introduction This study addresses the influence of transfer pricing tax compliance on the design and use of management control systems (MCSs) in multinational enterprises (MNEs) using one set of transfer pricing books. The domestic management accounting and control literature stresses the role of transfer prices as MCS instruments that differentiate and integrate the actions of parts of the

organisation and impact on performance evaluation (Colbert & Spicer, 1995; Eccles, 1983, 1985; Gosh, 2000; Luft & Libby, 1997; Spicer, 1988; Swieringa & Waterhouse, 1982; Van der MeerKooistra, 1994; Watson & Baumler, 1975). Cross-border transfer pricing in MNEs1 have traditionally received a place in other streams of the

1 In a multinational environment, the transfer...