Optimal Negotiated Transfer Pricing and its Implications for International Transfer Pricing of Intangibles

Abstract

Intangibles exhibit zero marginal licensing cost, including cross-border intra-firm licensing of intangibles within a multinational corporation (MNC). An MNC may not realise the full profit potential of licensing intangibles intra-firm, however, under suboptimal negotiated transfer pricing schemes. Our negotiated transfer pricing bargaining structure unlocks this potential by producing an optimal transfer price and larger optimal intra-firm licensed quantity. Increased licensing of intangibles intra-firm across borders produces a greater potential tax savings/consolidated after-tax profit gain per unit of transfer price adjustment, creating a context where MNCs feel a greater imperative or incentive to move beyond legal tax avoidance toward evasion.

Keywords: negotiated transfer pricing; NTP; licensing intangibles; arm's length royalty; decentralized decision making; multinational corporations; MNCs; international trade; intra-firm trade; tax avoidance; tax evasion; bargaining structure; marginal licensing cost; intra-firm licensing

JEL Classification: F23, H25, H26, L29, O34