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, maintained for sale to local customers, often changes in the course of the underlying product life cycle from a rather centralized to a highly decentralized orientation. Treating related transfer prices as poor relations may lead to suboptimal business decisions and/or disputes with tax authorities. This paper contributes a bipartite transfer pricing policy for two-tier supply chains with high frequency of internal transactions and low asset specificity – whereas 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). It considers that, over time, tier 1 suppliers can start to maintain assets on their own, takes into account reservation prices of final customers, may ensure compliance with the arm´s-length principle, and is fair and feasible. Empirical evidence is provided by a case study in the strategic after-sales service department of a multinational manufacturing company that pools service capacities temporarily in a few subsidiaries.