The Need for Working Capital Adjustments in a Transfer Pricing Setting: A Theoretical Note

6 Pages Posted: 26 Aug 2005

See all articles by Jamal Hejazi

Jamal Hejazi

Gowling Lafleur Henderson LLP - Transfer Pricing and Competent Authority

Date Written: July 1, 2004

Abstract

Transfer pricing involves the price that one member of a multinational organization charges another member operating in a different tax jurisdiction for goods, services or intangible property. Performing working capital adjustments are necessary to ensure that returns derived from a set of comparables can be reliably applied to a tested party operating in a non arm's length setting. There is no theoretical argument that suggests that working capital adjustments should be rejected. The analysis has shown that operating in a perfectly competitive environment implies that working capital adjustments are a requirement. These findings are supported on theoretical grounds which are violated when different working capital intensities between firms exist. Given that firms are assumed to be price-takers, then the only way that prices charged by all firms can be a taken as given is if all of the factors that affect prices, including working capital intensities, are the same.

Keywords: Transfer pricing, working capital adjustments, perfectly competitive markets

JEL Classification: L00

Suggested Citation

Hejazi, Jamal, The Need for Working Capital Adjustments in a Transfer Pricing Setting: A Theoretical Note (July 1, 2004). Available at SSRN: https://ssrn.com/abstract=784664 or http://dx.doi.org/10.2139/ssrn.784664

Jamal Hejazi (Contact Author)

Gowling Lafleur Henderson LLP - Transfer Pricing and Competent Authority ( email )

180 Elgin Street
Ottawa, Ontario K1P 1C3
Canada

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
894
Abstract Views
4,405
rank
33,856
PlumX Metrics