Transfer Pricing for Two-Tier Supply Chains: A Case Study in the Industrial After-Sales Service
Given a global network of subsidiaries, the ideal centralization degree of physical and/or human assets for supporting sales activities to local customers, may change from centralized to decentralized during the product life cycle. Transfer prices should be consistent with this, to support business decisions and/or avoid disputes with tax authorities. This paper describes a bipartite transfer pricing policy for two-tier supply chains with high frequency of internal transactions and low asset specificity, and whereby the tier 2 supplier is mandated to undertake investments to ensure supply readiness not only for own local customers, but also for customers of other subsidiaries (tier 1 suppliers). The transfer pricing policy considers that, over time, tier 1 suppliers can start to maintain assets on their own, it takes into account reservation prices of final customers, it may ensure compliance with the arm´s-length principle, and it is fair and feasible. This transfer pricing policy has been developed through a case study in the strategic after-sales service department of a multinational manufacturing company.