Flexible Management of Transfer Prices and Multiple Valuation Approach Based upon SAP ERP within the Context of International Controlling

CONTENTS

LIST OF FIGURES

ACKNOWLEDGEMENTS

1 INTRODUCTION
1.1 MOTIVATION AND PROBLEM DESIGN
1.2 LIMITATIONS OF THE STUDY
1.3 RESEARCH METHODOLOGY AND STRUCTURE

2 THEORETICAL FRAMEWORK AND ESSENTIALS
2.1 THE TERM CONTROLLING AND ITS CONCEPTIONS
2.2 CONTROLLING TASKS AND INSTRUMENTS
2.3 CONTROLLING IN INTERNATIONAL CONTEXT
2.3.1 COMPARATIVE APPROACH - MANAGEMENT ACCOUNTING VS.CONTROLLING
2.3.2 SPECIFIC FEATURES OF CONTROLLING IN MULTINATIONAL ENTERPRISES
2.4 BASICS OF TRANSFER PRICING AND RELATED TERMS

3 TRANSFER PRICES IN THE MANAGEMENT PRACTICE
3.1 THE RELATION BETWEEN TRANSFER PRICES AND DIVISIONAL STRUCTURE
3.2 FUNCTIONS AND PURPOSES OF TRANSFER PRICES
3.3 ALTERNATIVE METHODS OF TRANSFER PRICING
3.3.1 SETTING TRANSFER PRICES FROM THE BUSINESS ADMINISTRATION PERSPECTIVE
3.3.1.1 MARKET-BASED TRANSFER PRICES
3.3.1.2 COST-BASED TRANSFER PRICES
3.3.1.2.1 MARGINAL COST TRANSFER PRICES
3.3.1.2.2 FULL COST TRANSFER PRICES
3.3.1.2.3 DUAL PRICING
3.3.1.3 NEGOTIATED TRANSFER PRICES
3.3.2 SETTING TRANSFER PRICES FROM THE TAX-REGULATING PERSPECTIVE

4 FLEXIBLE MANAGEMENT OF TRANSFER PRICES BASED UPON SAP ERP AND MULTIPLE VALUATION APPROACH
4.1 THE EFFICACY OF SAP ERP IN TRANSFER PRICING
4.2 THE SAP ERP SYSTEM
4.2.1 BASIC FACTS ABOUT SAP AND THE STANDARD SOFTWARE ERP
4.2.2 THE STRUCTURE OF SAP ERP AND RELEVANT MODULES
4.2.3 CONTROLLING IN SAP ERP
4.2.3.1 CONTROLLING ENTERPRISE STRUCTURE
4.2.3.2 CUSTOMIZING CONTROLLING ORGANIZATION
4.3 DESIGNING TRANSFER PRICES AND MULTIPLE VALUATION APPROACH IN SAP ERP
4.3.1 CONFIGURING MULTIPLE VALUATIONS
4.3.2 CONFIGURING PROFIT CENTER ACCOUNTING
4.4 ECONOMIC VIABILITY OF SAP ERP IMPLEMENTATION

5 CONCLUSION

REFERENCES

BOOKS, JOURNALS AND ACADEMIC PAPERS

ONLINE SOURCES

ABSTRACT

According to the estimations of the World Trade Organization, sixty percent of the whole world trade is being concluded within the multinational enterprises. This can be put down to the fact that globalization has had led the enterprises separate business processes into divisions and the concept of “profit center” has gained currency in this regard. As a result of “vertical integration” between these profit centers, there is an enormous volume of exchanged goods within multinationals. This development in the practice gave rise to debates on an already existing issue, “Transfer Pricing”, however, from another dimension. The inter-company transfer of goods has gone beyond the domestic boundaries, and become an important issue in the international context. International Transfer Pricing can be assumed as an opportunity as well as a confounding factor from the perspective of multinational enterprises. On the one side, it is possible to move profits between individual divisions and create tax advantages depending on the corporate tax rates in different tax jurisdictions. On the other side, it becomes more complex for companies to track down the effects of intra-company transfers, evaluate the efficiency of the divisions and the company as a whole and make optimal decisions accordingly. At this point, some academicians propose using a multiple set of books to determine Transfer Prices. In so doing, they argue that managerial requirements can be met and optimal decisions can be reached for the good of the group as a whole.

In the light of this information, a software product named SAP® ERP® comes to attention with its unique feature in terms of determining Transfer Prices flexibly. The multiple valuation approach in this system enables the user set Transfer Prices in different valuation techniques, i.e. legal view, group view and profit center view. This study investigates the relationship between these two research objects; thus, aims to verify whether and up to which extent implementing such a system is functional and beneficial by composing Transfer Pricing and managerial requirements that come along with it.

LIST OF FIGURES

Figure 1: The relationship between managers and controllers in the decision making process

Figure 2: Classification of the functions related to Transfer Pricing

Figure 3: The input factors of the International Transfer Pricing system

Figure 4: Multiple Valuation Approach based upon SAP ERP

Figure 5: Worldwide ERP-Software market share 2012

Figure 6: SAP ERP CO Integration

Figure 7: Structural elements of relevant modules in Transfer Pricing

Figure 8: Major CO subcomponents concerning Transfer Pricing

Figure 9: The organizational hierarchy in CO

Figure 10: Creating currency and valuation profile

Figure 11: 3-Year Cost of SAP Deployment

Figure 12: Implementation period of SAP and competitors in months

- ACKNOWLEDGEMENTS -

“ The larger the island of knowledge, the longer the shoreline of wonder. ” - Ralph W. Sockman

As I come to the end of a long journey and qualify to obtain my master’s degree, there are some people to whom I would like to express my gratitude. This thesis would not have been possible unless they would have supported me. First, I owe my deepest gratitude to my beloved parents for their unconditional love and help during my whole life and during my studies in Fulda University of Applied Sciences as well as in the German speaking department of Marmara University.

Second, I would like to express my appreciation to my most distinguished professors, Prof. Dr. Erich Dörner and Prof. Dr. Carsten Müller, who do not resist me conducting this study and support my ambition for writing on this topic.

It will definitely be an honor for me being a graduate student of Fulda University and I am indebted to those who made it possible.

Frankfurt, May 2014

Cenk Yildirim

1 INTRODUCTION

In the following introductory chapter, it will be expressed comprehensibly in the first place as to why and how the author has come up with the idea to carry on this research, and then which inferences aimed for by the end of the research. Initially, in the section 1.1, the circumstances that led the author to write this thesis up will be discussed in an effort to emphasize the significance of the topic. Furthermore, the extent of the study and research object will be delimitated in the second section so that a more concrete research design can be developed. Finally, in the third section of this chapter, the methodology of the research will be outlined to provide the reader a better understanding of the tactic set for the verification of the research object together with defining the whole research structure to ensure an easier follow-up.

1.1 MOTIVATION AND PROBLEM DESIGN

In the last decades, globalization has turned out to be a major issue in terms of manufacturing for those companies who are mainly seeking for low production costs or for some other advantages that will bring them competitiveness in the market. As a result of being able to transact businesses easily in almost all countries around the world huge multinational enterprises¹ have arisen. These enterprises have established new production facilities in the search of new markets or resources or most importantly efficiency that is to be related with low input factors, such as low labor costs.²

Exactly because of this endeavor to be more competitive, companies incorporated foreign subsidiaries in various countries of the world and separated manufacturing into divisions in order to benefit from globalization. As a consequence, there is an enormous volume considering transfer or flow of different components or intermediate products between divisions or business segments of a multinational enterprise. At this point, pricing the products come into consideration since the international exchange or transfer of the goods have cost effect from the buyer side and revenue effect from the supplier side because of the fact that those divisions are each legal entities and are each liable to financial reporting and income tax.

Even though the valuation of Transfer Prices is regulated by lawful authorities, there are still some rooms for maneuver within the confines of these regulations, e.g., Arm’s Length Principle, which will be discussed in the upcoming chapters. Beside that Transfer Prices need sometimes to be valued in a way varying from the regulatory law in order to meet different demands of in-house executives for different purposes, and ultimately assist in resolving corporate decision-making and management issues. That brings out for sure the outstanding feature of Transfer Prices which is to affect both external and internal accounting (Financial and Management Accounting). Through assessing the exchange of goods and services using Transfer Prices, one can influence the actual success of the corporate divisions. Due to this fact, today’s accounting systems need to be able to provide decision support that represents operational results from different points of views and using different currencies. In addition to these, Hiemann/Reichelstein suggested in their article³ decoupling of Transfer Prices and criticized a unified Transfer Pricing model by indicating that Transfer Prices relying upon tax regulations don’t reflect the correct economics of transactions and provide divisional managers distorted information. Moreover, they mentioned that there is a lack of modelling efforts in this area and proposed that an adequate model would have evident potential for providing useful guidance to both controllers and tax departments in multinational enterprises.⁴

An additional comment on Hiemann/Reichelstein by Herzig, a proponent of their suggestion, added a further point, and mentioned a “two sets of books” rather than “one set of books” principle in this context. He has also advocated for the separation of Transfer Price functions through two sets of books. Nonetheless, he also became aware of the lack of this approach in day-to-day business practice. He has put this down to the important time and effort linked with the preparation and maintenance of such a system.⁵

Obviously, it requires a long-lasting workload to cope with this challenge. However, in order to overcome this problematic issue and meet the requirements, SAP® offers a solution by determining the Transfer Prices multiply within the software program ERP®. With the help of this system, operational results can be represented simultaneously from different points of view including surely the valuation of Transfer Prices according to the legal regulations. Results of operational activity which include hundred thousand of transferred goods between the divisions can be managed flexibly this way and therefore minimizes the workload notably.

Surprisingly, no specific resources are to be found in the literature which takes the Transfer Prices and their control with the aid of SAP ERP as a basis. Most of the books deal with the Transfer Prices from a theoretical and taxation perspective, explicating only the valuation of Transfer Prices in particular cases alongside with the guidelines or principles set for them by law authorities such as OECD. On the other hand, some other resources approach the subject from an IT-technical perspective, describing merely the configuration and customizing process in SAP system without associating anything with Transfer Prices.

In line with all this information, this research aims to verify the significance of SAP implementation with regard to Transfer Pricing and managerial demands that come along with it. Instead of describing solely the configuration of Transfer Prices on the SAP basis or illustrating the relevant adjustments in the SAP system it is the primary goal to supply information about the necessity of using SAP ERP to manage Transfer Prices. This will be examined by outlining up to which extent it is possible or helpful to carry out the activation of Transfer Prices through SAP ERP.

1.2 LIMITATIONS OF THE STUDY

Of course the intra-company transfers of the goods proceed domestically between divisions in home country as well. However, the subject matter of this research focuses on the international implications of the issue since the Transfer Pricing gains much more significance on international level considering first of all that it allows in some cases to disguise the profit and reduce the total corporate tax amount. Due to the differing corporate income tax rates of countries, it is a vital instrument to minimize tax strains. Moreover, according to the estimations of World Trade Organization, 60% of the whole world trade is being concluded within the multinational enterprises.⁶

On the other side, not only goods but also services like employee training or intangible assets, such as patents, trademarks or production technology, are being transferred between the divisions of an enterprise. Likewise banking sector is subject to Transfer Prices because it is usual that branches make fund transfers between themselves in order to act in compliance with e.g. deposit and loan limits, and thus emerge internal interest charges. In comparison to the transfer of goods, however, these services and intangible assets that have been transferred among different divisions own a very low percentage. That’s why, the main focus area of this research concerning Transfer Prices will only be those goods transferred.

As a last point, due to the research object that is intended to be inspected tax-oriented literature on Transfer Pricing will be mostly neglected whereas the author will stick to the managerial accounting literature.

1.3 RESEARCH METHODOLOGY AND STRUCTURE

Throughout this research, it is the primary goal to verify the necessity and practicability of SAP ERP in terms of managing Transfer Prices in accordance with the managerial demands. With this in mind, it is so to say that this research is of subjectivist philosophy⁷ and has an explanatory objective⁸ considering that it attempts to clarify the relationship between Transfer Prices and SAP ERP system. In virtue of its subjectivist nature, the research approach or form used to achieve this objective is qualitative⁹. However, it will not be conducted any empirical field study to collect primary data since the verification of the research question doesn’t require any of it. Tough, some secondary data will be searched thoroughly in order to provide a better insight to the subject matter “Transfer Prices”. Hence, it can be said that the research relies predominantly on conceptual data, and depending on this, the type of the research is rather analytical due to the fact that the author uses facts or information already available, and analyze this to make a critical evaluation of the research object.¹⁰

Rather than focusing on the taxational/fiscal circumstances concerning Transfer Prices in multinational enterprises this issue will be taken in hand from a Management Accounting/Controlling perspective as mentioned before. In this sense, in chapter 2, it will be given, first of all, some fundamentals about Controlling, especially in the international context. Subsequently, relevant essentials about Transfer Prices will be explained in order to establish a better background for upcoming chapters.

After describing the theoretical framework both for International Controlling and Transfer Prices the study progresses with third chapter which deals with the in-depth analysis of Transfer Pricing in business and management practice. During this chapter, the roles and functions of Transfer Pricing in multinational enterprises as well as the valuation of them between divisions will be explicated.

The fourth chapter presents the focal point of the whole study where the relationship between Transfer Prices and SAP ERP will be revealed. Firstly, the multiple valuation approach according to the SAP system is going to be drawn out in an effort to signalize the utility and efficacy of creating scenarios for different managerial requirements in Transfer Pricing. Afterwards, a brief description of SAP system will be given, and then, the relevant modules of SAP ERP and their elements concerning the management of Transfer Prices will be introduced. It is going to be gone after the answers of the questions which factors play an important role during the design of scenario technique and what kind of a relation there is between SAP and Transfer Prices.

Lastly, in the final chapter, all the information conveyed in the study will be summarized, and subsequently evaluated in order to draw a conclusion whether and up to which extent SAP ERP is functional considering the Transfer Prices in management practice.

2 THEORETICAL FRAMEWORK AND ESSENTIALS

2.1 THE TERM CONTROLLING AND ITS CONCEPTIONS

Controlling is such a management concept on whose definition and denotation academicians couldn’t reach any consensus yet. This notion is supported by Preissler who puts forth: “Everybody has their own idea of what Controlling involves or should involve, and everybody means something different.”¹¹ This may be traced back to the fact that the perception of Controlling has evolved considerably since its emergence. Actually, the term is not used in the Anglo-American management studies, on the contrary, mostly in the German speaking environment.¹² Nevertheless, the first positions related to this profession appeared in the USA was named as “Controller”¹³, which then serves as a basis for the development of the concept Controlling in Germany¹⁴.

The term “Controlling” derives from the word “to control”¹⁵, however, Horvath and Piontek warn that misunderstandings may occur when this verb, to control¹⁶, with its general usage in the German management literature is used in order to describe what Controlling is because it corresponds to nothing more than reviewing, reexamining a process or drawing a comparison.¹⁷ Indeed, it comprises a notably broader scope and involves functions such as “planning, executing, coordinating, monitoring, regulating” in the management context.¹⁸ The definitions related to Controlling distinguish principally in respect of the different Controlling conceptions in the German literature. As to Weber/Schäffer these conceptions¹⁹ can be outlined in four categories:

Controlling as an information supply function Controlling as results-oriented control Controlling as a coordination function Controlling as assuring the rationality of management They reduced these conceptions then to a simpler state by summarizing them in three different approaches²⁰: information-based, results-based and coordination-based Controlling approaches. It might be helpful for the reader making an analogy of the various definitions and conceptions of Controlling by the most cited authors in the German literature so that the dynamics and extent of this management activity can be better understood.

Reichmann²¹ defines Controlling as the “goal-oriented assistance of management functions that serves for the system supported information procurement and processing in order to be able to plan, coordinate and control; it is an accounting system for the purpose of enhancing the decision quality in all of the managerial levels of an enterprise.” He emphasizes thereby the information-based approach and the conception of “Controlling as an information supply function”.

On the other hand, Horvath²² characterizes Controlling as follows: “Controlling is a subsystem²³ of management which coordinates planning, control and supply of information in line with the result-oriented purposes so that the overall adaptation and coordination of the system can be supported.” In comparison to Reichmann, he highlights, with this definition, the coordination-based approach and the conception of “Controlling as a coordination function” or with other words, he mentioned Controlling is not just providing figures and ratios, but more importantly communicating them properly.

Furthermore, Weber/Schäffer brought forward the most recent conception of “Controlling as assuring the rationality of management”, which is, in fact, a critical approach against the coordination approach. Due to the limited cognitive abilities and possible opportunistic deals of the actors that involve in the enterprise management, some rationality deficits might occur, which is to be perceived and eliminated through Controlling.²⁴ They harmonized this approach with Anthony²⁵ by giving this definition of him: “Management control is the process by which managers assure that resources are obtained and used effectively and efficiently in the accomplishment of the organization’s objectives.”

2.2 CONTROLLING TASKS AND INSTRUMENTS

In addition to the aforementioned conceptions and definitions of Controlling, it is of crucial importance to concretize the various tasks of a Controller together with the instruments implemented.

Basically, Controlling is a management support activity, and Controllers have some main activities²⁶ in this regard, e.g., information procurement, information processing, data analysis, evaluation and control. They do support their managers in a variety of ways by undertaking specific tasks related to these activities. By accomplishing these tasks, they prevent managers from making inefficient decisions and ensure transparency of business results, finance, processes and strategy.²⁷

Figure 1 exhibits this relationship between managers and controllers with regard to the decision making process as hereinafter provided:

illustration not visible in this excerpt

Figure 1: The relationship between managers and controllers in the decision making process ²⁸

As can be understood from the figure above, Controlling consists of the interaction between Manager and Controller.

In order to particularize the above mentioned tasks and to present the undertaking of which tasks contribute to this interaction, it can be said that budgeting (preparation and consolidation of the budget), operational and strategic planning, internal reporting, internal accounting, capital budgeting are some examples of main Controller tasks²⁹. However, it can be rather confusing sometimes to classify tasks and instruments taking into account that there is also a discrepancy in the Controlling literature. For example, cost accounting is identified as a basic Controlling instrument as well as a Controlling task by some researchers³⁰. This may be put down to the fact that cost accounting is a task as well as a tool to accomplish important Controlling activities. Nevertheless, within the scope of this research, cost accounting plays an important role considering Transfer Prices and it will be approved as a Controlling instrument throughout the rest of the study. Transfer Prices will also be approved as a Controlling instrument in this regard. Besides, some other major instruments³¹ of Controlling are BreakEven-Analysis, Target - Actual Comparison, Variance Analysis, SWOT-Analysis, PortfolioAnalysis, Target-Costing, Activity-Based-Budgeting, and Balanced Scorecard etc.

On the other side, Controlling has a functional dimension and the tasks and instruments used vary also depending on the functional area³². The functional areas³³ can be classified as follows: Marketing-Controlling, Risk-Controlling, Personnel-Controlling (HR-Controlling), Production-Controlling, R&D-Controlling, Logistics-Controlling, Investment-Controlling, ITControlling and Project-Controlling.

Finally, Controller tasks range from operative Controlling tasks to strategic Controlling tasks. Operative Controlling tasks deal more with dimensions like Revenue/Expenditure, Costs/Performance, Income/Expense and Inpayment/Outpayment. Because of this, the period under consideration is short-term and it relies on the current or previous monetary data from internal sources, especially from the cost accounting. Profitability, productivity and financial solvency are the primary goals in this regard. In contrast to it, strategic Controlling evolve out of long-term considerations and focuses more on strength, weaknesses, opportunities and threats that can be encountered in the future.³⁴

2.3 CONTROLLING IN INTERNATIONAL CONTEXT

2.3.1 COMPARATIVE APPROACH - MANAGEMENT ACCOUNTING VS.CONTROLLING

As mentioned before in the section 2.1, the term “Controlling” is not being used in the Anglo- American management literature³⁵. Instead, terms “Management Accounting”, “Managerial Accounting”, “Management Control Systems” or “Controllership”³⁶ are being used to define the same concept as Controlling has in Germany and for the person, who assumes the responsibilities of this area, is the title Management Accountant³⁷ conferred. Taking a look at the definition of Management Accounting by Horngren et al.³⁸, the similarity of the concepts can be better understood: “Management Accounting measures, analyzes, and reports financial and nonfinancial information that helps managers make decisions to fulfill the goals of an organization. Managers use Management Accounting information to choose, communicate, and implement strategy.” This definition supports the statement³⁹ that Management Accounting is from a functional point of view with German Controlling comparable but not identical.

Identical it is not because the concept of Controlling exceeds the extent of Management Accounting. It has a function of guidance and, thus is more strategy oriented, whereas Management Accounting is closely associated with accounting and concerns with operative satisfaction.⁴⁰ This distinction can also be proven by the fact that spectrum of tasks of Management Accountants or Controllers in the USA ranges from those of in Germany, especially, in the responsibility area “Financial Accounting” (External Accounting). The US- American colleagues of German Controllers have a strong focus on financial reporting⁴¹ and provide information for the needs of external parties and addressees as well. This has caused some more focus on extra task fields, such as preparation of the balance sheet according to the relevant financial reporting standards, external reporting to banks, government agencies,investors and dividends, corporate taxation (tax administration) and company insurance.⁴² An empirical survey by Stoffel⁴³ is the mainstay regarding the authentication of this difference in the area of responsibilities of Controllers in Germany and USA which presents that almost 100% of the US-American Controllers deal with the Financial Accounting issues whereas only 25% of their German colleagues are responsible for the same field of task.

Nevertheless, main tasks of Management Accountants started to evolve in the last two decades since there is a transformation of tasks from an accountancy-oriented dimension to a strategy-oriented dimension. Management Accountants assume now tasks regarding strategic planning and process improvement, and as a result of this, Institute of Management Accountants⁴⁴ (IMA) wanted for a revised definition of Management Accounting which is as follows: “Management Accounting is a profession that involves partnering in management decision making, devising planning and performance management systems, and providing expertise in financial reporting and control to assist management in the formulation and implementation of an organization’s strategy.” In the light of this information, it can be said that Management Accountants turned out to be internal business consultants or with other words strategic business partners like their German colleagues, working side-by-side in cross- functional teams with managers from all areas of the enterprise.⁴⁵

2.3.2 SPECIFIC FEATURES OF CONTROLLING IN MULTINATIONAL ENTERPRISES

Previously mentioned remarks about Controlling are also regarded as applicable in the international dimension of Controlling. However, there are some complementary issues considering international Controlling or some problematic issues stand out with their international aspects. Within the multinational enterprises some Controlling tasks and instruments gain much more in importance and become much more complex to cope with which presents a formidable challenge for the Controllers. These tasks and instruments of a Controller are generally affected by two parameters⁴⁶ in the international context. One of them is the economic circumstances and the other one is the judicial circumstances.

In particular, these complex issues influenced by the above mentioned parameters feature, first of all, the Transfer Pricing factor which accounts for the key aspect of this study, and thus for the good of the study, is of highest significance. The profit allocation property of Transfer Prices and tax manipulations that come out as a result of it have made this issue a major actor in the International Controlling practices. Besides, in the planning and control process, the effect of foreign currency, inflation rates and country risks plays a very important role as well. Moreover, taxation and consolidation problems both in external and internal accounting are some other notable confounding factors in International Controlling. Finally, aside from economic and judicial circumstances organizational issues as well as cultural differences concerning Controlling institution are the last major problems⁴⁷ in this context.

2.4 BASICS OF TRANSFER PRICING AND RELATED TERMS

Approaching Transfer Prices as a confounding factor in the international context of the Controlling activities, in the first stage, a brief explanation will be given as to what the term “Transfer Pricing” really involves together with defining some other terms that can be correlated with it so that an introductory theoretical insight to the subject matter can be provided.

The term Transfer Prices has established itself a reputable position in the German management and economics studies and leaded to academic debates since Schamelanbach⁴⁸ has first dealt with the issue of pricing delivered goods and services between units of a single firm in his dissertation completed in 1909. On the other side, there is no evidence about the emergence of the term in the Anglo-American management and economics literature.

According to Hilton⁴⁹, Transfer Pricing can be defined as follows: “The price at which products or services transferred between two subunits of an organization is called a Transfer Price.” However, this definition is rather inadequate since it leaves some other actions concerning Transfer Prices out of account. In addition to its widely mentioned feature of determining or setting prices/charges for transferred goods or services between related parties, it involves also analysis, documentation, and adjustment of these charges.⁵⁰ These goods transferred from the supplying division to the receiving division are accepted as intermediate products whereas the goods sold by a receiving division to the outside world are accepted as final products.⁵¹ In the light of these definitions, the following illustration⁵² can be drawn up:

Volkswagen produces parts of its model Jetta in its plant in Chattanooga, USA. These parts are then being sent to another plant in Puebla, Mexico which is responsible for assembling these automobile parts. Transfer Prices regarding this example are the internal charge paid by Puebla plant to Chattanooga plant of Volkswagen Group.

Apart from the above given example which presents a transfer from one subsidiary to another subsidiary of the same parent, the transfers can be from an affiliate to its parent (upstream) or from the parent to its affiliate (downstream).⁵³ Moreover, the transfer of goods or services can occur in three various cases:⁵⁴

Deliveries between particular cost centers, Deliveries between factories, departments or business segments that do not sell any product, semi-product or service to outer markets, Deliveries between legal entities of a group enterprise.

In the latter case, it is the matter of Transfer Prices within a group enterprise and, in case that group enterprise consist of subsidiaries or affiliates in more than one country like the same case reflected by the above given example, Transfer Pricing acquires an international character what constitutes the central point of this study. In this context, tax issues and other determinants come into managerial considerations and Transfer Prices increase much more in importance. The following chapter attends to an elaboration of the subject Transfer Prices and this issue as a matter of course.

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¹ The term “multinational enterprise” is assumed in this research as a vertically integrated enterprise or group company with organizational units in at least two different countries. The units discussed here can be departments, divisions, or related enterprises and will henceforth be designated mostly as “divisions” throughout this study. Some other synonyms used for multinational in the literature include: “international”, “global”, “world-wide”, “supranational”, and “transnational”. Preferably, the adjective “multinational” will be used in the following chapters of the study. Besides, Porter describes the vertical integration as follows: "Vertical integration is the combination of technologically distinct production, distribution, selling and/or other economic processes within the confines of a single firm.” Porter, M. (1980): Competitive Strategy, p. 300.

² Efficiency-seeking (low labor costs, low income taxes), resource-seeking (securing unobtainable raw materials) and market-seeking (maximizing sales volume) are the types of Foreign Direct Investment. Confer hereto: Casi,L. / Resmini, L. (2010): Evidence on the Determinants of Foreign Direct Investment - The case of EU regions, in: Eastern Journal of European Studies, pp. 95-104.

³ Cf. Hiemann, M. / Reichelstein, S. (2012): Transfer Pricing in Multinational Corporations - An integrated management and tax perspective, in: Schön, W. / Konrad, K. A. (eds.), Fundamentals of International Transfer Pricing in Law and Economics, p. 15 f.

⁴ Cf. Hiemann, M. / Reichelstein, S. (2012): ibid., p. 17.

⁵ Cf. Herzig, N. (2012): Comment on Hiemann and Reichelstein: “Transfer Pricing in Multinational Corporations- An integrated management and tax perspective”, in: Schön, W. / Konrad, K. A. (eds.), ibid., p. 21.

⁶ Cf. Ernst & Young (2013): Global Transfer Pricing Survey; cf. Horvath, P. (2006): Controlling, p. 568.

⁷ Cf. Holden, M. T. / Lynch, P. (2004): Choosing the Appropriate Methodology - Understanding research philosophy, in: The Marketing Review, p. 400.

⁸ Cf. Kumar, R. (2014): Research Methodology - A step-by-step guide for beginners, p. 13.

⁹ Cf. Möller, K. (2005): Forschungsmethoden und Forschungsstrategien im Controlling, in: Weber, J. / Meyer, M. (eds.): Internationalisierung des Controllings, pp. 167-169; cf. Kothari, C. R. / Garg, G. (2014): Research Methodology - Methods and techniques, p. 4.

¹⁰ Cf. Kothari, C. R. / Garg, G. (2014): ibid, p. 3.

¹¹ Preissler, P., R. (2007): Controlling - Lehrbuch und Intensivkurs, p. 14.

¹² Refer to subsection 2.3.1.

¹³ Controller: “is a person who carries out a certain set of Controlling tasks” Weber, J / Schäffer, U. (2008): Introduction to Controlling, p. 1.

¹⁴ The development of the concept “Controlling” and the title “Controller” will be neglected deliberately in order to not depart from the main subject. However, there is an agreement between German researchers that it was Albert Dehyle who has originated the term in Germany.

¹⁵ Jung, H. (2011): Controlling, p. 4.

¹⁶ To control is often translated or understood in the German management literature as “Kontrolle” and defined as the comparison between planned and realized values in terms of information about the operational result. Confer hereto: Horvath, P. (2006): ibid., p. 18.

¹⁷ Cf. Piontek, J. (2005): Controlling, p. 17; cf. Horvath, P. (2006): ibid., p. 18.

¹⁸ Cf. Piontek, J. (2005): ibid., p. 17.

¹⁹ Cf. Weber, J. / Schäffer, U. (2008): ibid., pp. 20-29.

²⁰ Cf. Weber, J. / Schäffer, U. (2008): ibid., p. 28.

²¹ Reichmann, T. (2006): Controlling mit Kennzahlen und Management-Tools - Die systemgestützte ControllingKonzeption, p. 13.

²² Horvath, P. (2006): ibid., p. 134.

²³ Controlling system is conceptualized by Horvath and he maintains the opinion that it includes the following subsystems: Controlling tasks, Controlling organization and Controlling instruments. Confer hereto Horvath, P. (2006): ibid., p. 132; but, for a detailed clarification of the terms “System” and “Subsystem” with respect to analyzing Controlling functions, cf. Horvath, P. (2006): ibid., pp. 81-100.

²⁴ Cf. Weber, J. / Schäffer, U. (2008): ibid., p. 28.

²⁵ Anthony, R. N. (1965): Planning and Control Systems, p. 17; cited by Weber, J. / Schäffer, U. (2008): ibid., p.29.

²⁶ Reichmann, T. (1997): Controlling - Concepts of management control, controllership and ratios, p. 5.

²⁷ Cf. The International Controlling Association (ICV) and The International Group of Controlling (IGC) (2012): The Essence of Controlling - The perspective of ICV and IGC, pp. 4-6.

²⁸ Own illustration adapted from ICV/IGC (2012): ibid., p. 4.

²⁹ Stoffel, K. (1995): Controllership im internationalen Vergleich, p. 159.

³⁰ Cf. Jung, H. (2011): ibid., p. 55; cf. Hoffjan, A. (2009): Internationales Controlling, pp. 11-32; cf. Weber, J. / Schäffer, U. (2008): ibid., p. 12; cf. Stoffel, K. (1995): ibid., p. 157.

³¹ Cf. Vollmuth, H. J. (2011): Controlling-Instrumente, pp. 11-14.

³² In the German literature, the term “Bereichscontrolling” is being mostly used to point out the functional areas of Controlling.

³³ www.controllingportal.de: “Functional Areas of Controlling” (Access: 07.04.2014).

³⁴ Cf. Fischer, T. M. / Möller, K. / Schultze, W. (2011) : Controlling - Grundlagen, Instrumente und Entwicklungsperspektiven, pp. 5-8; cf. Jung, H. (2011): ibid., pp. 14-16.

³⁵ Cf. Weber, J. / Meyer, M. (2005): Controlling im Spannungsfeld der Internationalisierung, in: Weber, J / Meyer, M (eds.), ibid., p. 3.

³⁶ The slight distinction between Management Accounting and Controllership will not be explicated in order to stick to the main point. However, for a detailed information, cf. Hoffjan, A. (2009): ibid., p. 26; cf. Fischer, T. M. et al. (2012): ibid., p. 41.

³⁷ Cf. Weissenberger, B. E. / Angelkort, H. / Holthoff, G. (2010): Management Accounting System Design and Controllership Output Quality - Evidence of a preparer-user perception gap, p. 1; cf. Hoffjan, A.: ibid, p. 25; cf. Fischer, T. M. et al.: ibid., p. 39.

³⁸ Horngren, C. T. / Datar, S. M. / Foster, G. et al. (2009): Cost Accounting - A managerial emphasis, p. 30.

³⁹ Hoffjan, A. (2009): ibid, p. 26.

⁴⁰ Cf. Hoffjan, A. / Wömpener, A. (2005): Comparative Management Accounting - Similarities and differences in German and English language Management Accounting textbooks, in: Weber, J.; Meyer, M. (eds.), ibid., pp. 50-52.

⁴¹ “Management Accounting and controllership practices are more highly developed in German-speaking countries than in the rest of the world…Contrast this to the U.S. where there’s a dominant emphasis on financial accounting and regulatory reporting…” Sharman P. A. / Vikas, K. (2004): Learning from German Cost Accounting, in: Strategic Finance, Vol. 85, Issue December, p. 28; cited by Weissenberger, B. E. / Angelkort, H. (2009): Integration of Financial and Management Accounting Systems - The mediating influence of a unified financial language on controllership effectiveness, p. 5.

⁴² Cf. Weber, J. / Schäffer, U. (2008): ibid., pp. 10-13.

⁴³ Cf. Stoffel, K. (1995): ibid., p. 157.

⁴⁴ Institute of Management Accountants: Definition of Management Accounting (2008), p. 1; cited by Fischer, T.M. et al. (2012): ibid., pp. 42-45.

⁴⁵ Cf. Hilton, R. W. (2009): Managerial Accounting - Creating value in a dynamic business environment, pp. 4/5.; cf. Fischer, T. M. et al. (2012): ibid., pp. 42-45.

⁴⁶ Cf. Reichmann, T. (2011): Controlling mit Kennzahlen - die systemgestützte Controlling-Konzeption mit Analyse- und Reportinginstrumenten, pp. 632/633.

⁴⁷ Cf. Reichmann, T.: ibid (2011)., p. 703-715.; cf. Rothlin, P. (1999): Internationales Controlling, pp. 273-398; cf. Hoffjan, A. (2009): ibid, pp. 15-17 and pp. 41-127; cf. Behringer, S. (2011): Konzerncontrolling, pp. 197-207.

⁴⁸ It is generally acknowledged in the German literature that Schmalenbach with the following dissertation title: “Die Verrechnungspreise in großindustriellen Betrieben”, is the first researcher conducting a study about Transfer Pricing in the German speaking area (The terms “Verrechnungspreise”,“Lenkungspreise” or “Transferpreise” are being used as German translations for Transfer Prices). Confer hereto especially, Fischer, T. M. et al. (2012): ibid., p. 448; Coenenberg, A. G. / Fischer, T. M. / Günter, T. (2009): Kostenrechnung- und Kostenanalyse, p. 689; Weber, J. / Schäffer, U. (2014): Einführung in das Controlling, p. 211; and, for a detailed explanation of the terms “Verrechnungs-“, Lenkungs-“ and “Transferpreise”, confer especially; Ewert, R. / Wagenhofer, A. (2008): Interne Unternehmesrechnung, p. 573; Friedl, G. / Hofmann, C. / Pedell, B. (2010): Kostenrechnung - Eine entscheidungsorientierte Einführung, p. 562.

⁴⁹ Hilton, R. W. (2009): ibid., p. 544.

⁵⁰ Cf. Schön, W. (2012): Transfer Pricing - Business incentives, international taxation and corporate law, in: Schön, W. / Konrad, K. A. (eds.), ibid., p. 47.

⁵¹ Cf. Drury, C. (2008): Management and Cost Accounting, p. 502; cf. Horngren, C. T. et al. (2009): ibid., p. 800.

⁵² www.timesfreepress.com: “Jetta, small SUV production eyed for Chattanooga” (Access: 11.04.2014).

⁵³ Doupnik, T. S. / Perera, H. B. (2009): International Accounting, p. 493.

⁵⁴ Coenenberg, A. G. et al. (2009): ibid., p. 690.