Internal Trade and Transfer Pricing in Large British Multi-Divisional Companies : A Contextual Approach

This paper offers organisational and behavioural insights into British domestic transfer pricing practice on a sample of 33 large manufacturing companies. Company practice is related to organisational characteristics, business strategy, divisional autonomy and management control. The findings indicate that high volumes of transfers are associated with certain industry sectors, the pattern of diversification and, to a lesser extent, with divisionalisation structure. The transfer pricing system is an integral part of the management control process in the multi-divisional company regardless of the level of internal trade. Restrictions on external sourcing (or the make-or-buy decision) of the transferred product, and mandated transfer prices are also found to be associated with high levels of internal trade and product idiosyncrasy. In their choice of transfer pricing policy, companies show a clear preference for market-oriented pricing, simplicity in determining specific prices, and adaptation of policies to change