Transfer pricing and channel structure of a multinational firm under overseas retail disruption risk

Abstract

Considering a chain-to-chain competition model, we formulate a new multinational firm's (MNF's) trade-off between global tax-planning gains (via transfer pricing) and channel decentralisation loss. In the presence of an established MNF's competition, it is optional for the new MNF to operate two divisions (one for domestic manufacturing and one for overseas retailing) or one integrated division selling products to an independent overseas retailer at a wholesale price. For the former, we characterise the new MNF's transfer pricing strategies and find that interestingly, MNFs might both keep profits in high-tax region due to the tense competition in the retailing stage. For the latter, we find that the new MNF's channel decentralisation via wholesaling can be a win–win situation for the established MNF and itself, when the new MNF's overseas retail cost is in a moderate range. We further examine the new MNF's overseas retail disruption risk and find that, this risk drives the new MNF to lower the transfer price sharply and intensifies the retail competition. We use contraction mapping argument to show the uniqueness of the system equilibrium.

Keywords:

• global retailing
• transfer pricing
• channel competition
• retail disruption risk

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 On 24 February 2017, MINISO opened seven retail stores in five countries on the same day. Till now, MINISO has opened more than 1800 stores all over the world. Its global revenue reached 5 billion RMB in 2015 and showed a rapidly increasing trend (MINISO 2017). Similarly, it is estimated by eMarketer that the cross-border retail e-commerce sales in China will grow up to total $110.68 billion in 2017, increasing by 29.1% (Retail & Ecommerce 2017).

2 According to the latest data from Deloitte (2017), the United States is one of the countries that have the highest statutory corporate tax rate – 35%, while the actual corporate tax rate under preferential tax policies in the United States is 28% (Choi 2017). Ireland is one of the countries that have the lowest corporate tax rate – 12.5%. We omit the ‘policy tax heaven’ such as Cayman Islands, Nauru and so on, because firms will not have sales there.

Additional information

Funding

Baozhuang Niu was supported by National Natural Science Foundation of China (NSFC) Excellent Young Scientists Fund [grant number 71822202]; NSFC [grant number 71571194], Chang Jiang Scholars Program (Niu Baozhuang 2017); and Guangdong Province Universities and Colleges Pearl River Scholar Funded Scheme (GDUPS) (Niu Baozhuang 2017). Feng Liu was supported by the NSFC [grant numbers 71502026 and 71872033].