Management Accounting Research 24 (2013) 175–194

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Management Accounting Research

journal homepage: www.elsevier.com/locate/mar

Tax strategy control: The case of transfer pricing tax risk

management
Christian Plesner Rossing ∗
Copenhagen Business School, Department of Accounting & Auditing, Solbjerg Plads 3, DK-2000 Frederiksberg, Denmark

a r t i c l e i n f o a b s t r a c t

Keywords: This paper examines how a functional tax strategy impacts the management control system
Tax risk management (MCS) in a multinational enterprise (MNE) facing transfer pricing tax risks. Based on case
Management control systems
study findings it is argued that the MCS in a multinational setting is contingent upon the
Tax strategy
MNE’s response to its tax environment. Moreover, the paper extends existing contingency-
International transfer pricing
Inter-organisational networks based theory on MCS by illustrating the role of inter-organisational network collaboration
across MNE transfer pricing tax experts. This collaboration, caused by a widely dispersed tax
knowledge base, fuels the formal interactive control system and reduces tax uncertainty.
The paper adopts an interdisciplinary approach for explaining findings, using contingency-
based theory and network theory at the inter-organisational level.
© 2013 Elsevier Ltd. All rights reserved.

1. Introduction Recent studies (Cools et al., 2008; Cools and Slagmulder,

This paper addresses how a tax strategy influences the
management control system1 (MCS) in a tax compliant
multinational enterprise (MNE) facing transfer pricing tax
risks.2
∗ Tel.: +45 38152343; fax: +45 38152321.
E-mail address: cro.acc@cbs.dk
1
The MCS literature offers several definitions and discussions as
to what constitutes MCS (Abernethy and Chua, 1996; Anthony, 1965;
Chenhall, 2003; Emmanuel et al., 1990; Green and Welsh, 1988; Langfield-
Smith, 1997; Merchant and Van Der Stede, 2007; Simons, 1994). In this
paper, Simons’ definition of MCS is applied; this definition suggests that
MCS are ‘the formal, information-based routines managers use to main-
tain or alter patterns in organizational activities’ (Simons, 1994, p. 5).
2
The term ‘risk’ refers to unpredictability in corporate outcome vari-
ables (Miller, 1992) and hence covers downside as well as upside risks.
Transfer pricing risks normally concern double taxation risks and rep-
utational risks. Double taxation risks relate to a situation where tax
authorities in one tax jurisdiction adjust the transfer prices used by a
local MNE entity and a corresponding adjustment is denied. In this case,
the same income will be taxed twice. Reputational risks relate to a situa-
tion where an MNE’s reputation is negatively impacted in case of a public
announcement of a transfer pricing audit adjustment. Hence, transfer pri-
cing risks are usually considered as potential downside deviations from
expected organisational performance, although upside transfer pricing
2009; Deloitte, 2007; Oosterhoff, 2006; Wunder, 2009)
indicate that international transfer pricing is the primary
tax risk management topic in multinational enterprises
(MNEs). Transfer pricing risks are a consequence of
uncertainty3 in the tax environment surrounding MNEs
(Eden et al., 2005; Mills et al., 2010). This uncertainty pri-
marily relates to ambiguous transfer pricing regulations
and inconsistency in the way different tax jurisdictions
apply the arm’s-length principle when examining MNEs’
transfer pricing practices (Eden et al., 2001; Oosterhoff,
2006; Picciotto, 1992). As the volume of intra-group trading
in MNEs is considerable (UNCTAD, 2003; U.S. Department
of Commerce, 2011), tax risks linked to international trans-
risks do exist. One example is when an MNE entity receives an upward
adjustment on a negative taxable income and the corresponding entity
has a positive taxable income and is not located in a tax haven. In this
case, the net tax effect of the adjustment at group level is positive.
3
The term ‘uncertainty’ refers to the unpredictability of environmental
or organisational variables that impact organisational performance (Miles
and Snow, 1978), or the lack of desired information about such variables
(Galbraith, 1977). Uncertainty about environmental and organisational
variables reduces the predictability of corporate performance and hence
increases risk (Miller, 1992).

1044-5005/$ – see front matter © 2013 Elsevier Ltd. All rights reserved.
http://dx.doi.org/10.1016/j.mar.2013.04.008
176 C. Plesner Rossing / Management Accounting Research 24 (2013) 175–194
fer pricing have become significant and should be properly
managed.
While a few studies have examined tax regula-
tion effects on transfer pricing practices in MNEs (e.g.
Borkowski, 2001, 2008, 2010; Cools et al., 2008; Cools
and Slagmulder, 2009; Plesner Rossing and Rohde, 2010),
these studies have not explicitly investigated how MNEs
attempt to reduce tax uncertainty linked to international
transfer pricing and the way MCSs can be employed
and used for this specific purpose. Such studies are
relevant, as they may improve the current literature’s
limited understanding of how MNEs apply MCS for tax
risk management purposes and assist top managers in
practice in their search for ideas to manage tax risks.
Consequently, this paper seeks to answer the research
question:
How does a functional tax strategy influence the
management control system in a multinational enterprise
facing transfer pricing tax risks?
The present paper responds to recent calls for stud-
ies of organisational risk management practices and the
way MCS can be used for this purpose (Arena et al.,
2010; Bhimani, 2009; Hagigi and Sivakumar, 2009; Woods,
2009), including the role of inter-organisational networks
for risk management and strategic control (Chua and
Mahama, 2007; Hopwood, 1996; Miller et al., 2008). It
contributes to the contingency-based school of accounting
research, which investigates how and to what extent man-
agement accounting and control systems are contingent
upon organisational and environmental circumstances
(e.g. Borkowski, 1990, 1992a,b, 1997; Chenhall, 2003; Cools
et al., 2008).
Also, the paper aims at integrating accounting and tax-
ation disciplines, as called for in recent literature reviews
(e.g. Dykxhoorn and Sinning, 2010; Hanlon and Heitzman,
2010; Shackelford and Shevlin, 2001). So far, these two aca-
demic disciplines have tended to be treated separately in
the literature, in spite of the close relationship that exists
between them.
In a practical sense, this paper responds to recent
calls for MCS research that focuses on providing research
insights and results that are useful to corporate managers
in real-life situations (e.g. Baldvinsdottir et al., 2010). Inter-
national transfer pricing remains at the top of the tax
risk management agenda in MNEs (Wunder, 2009), and
hence contributions that may assist practitioners in their
search for ideas on how to align their practices with an
increasingly uncertain and ambiguous tax environment are
required.
The paper is structured as follows: Section 2 presents
the MNE tax environment. Section 3 presents the con-
temporary transfer pricing literature and this study’s
theoretical frame of reference. Research strategy and
design are described in Section 4, and Section 5 presents
the case analysis and results. Section 6 discusses case
results, and Section 7 presents the conclusions of the
study.
2. Tax environment
The increase in MNE intra-group trading over the past
decades has presented tax authorities and regulators with
new issues and increased complexity, resulting in the
area of international transfer pricing becoming a centre of
primary attention. The reason is that corporate tax rate
differentials have offered MNEs the opportunity to use
international transfer pricing for profit accumulation in
low-tax jurisdictions (Eldenburg et al., 2003; Rahman and
Scapens, 1986). Consequently, a number of initiatives have
been established with the purpose of encouraging MNEs
towards behaviour that represents market behaviour, in
order to ensure that each tax jurisdiction hosting MNE
activities receives a fair share of the total value creation
(Picciotto, 1992). The initial attempt to encourage such
behaviour was made when the OECD issued the OECD
Transfer Pricing Guidelines in 1979. In 1994, the US tax
authorities launched their own regulatory standards (IRS,
1994), which were followed by the OECD’s 1995 revi-
sion (OECD, 1995) of the 1979 Guidelines and subsequent
additions to those revised Guidelines (OECD, 1996, 1997,
1999, 2010). Since then, a number of countries world-
wide have implemented local regulations,4 mostly in line
with the OECD Guidelines (Cools et al., 2008, p. 605).
While some differences exist in local regulations (Cools
and Emmanuel, 2007; Deloitte, 2007; Ernst & Young, 2009),
the arm’s-length principle in the OECD Model Tax Conven-
tion Article 9 (OECD, 1992) continues to be a fundamental
concept in the global regulation of international transfer
pricing. The arm’s-length principle basically establishes
that when divisions or business units in an MNE engage
in intra-group transfers of goods, services and intangi-
bles, they should price such transfers according to the
price that would have been set if the transfer had taken
place between independent parties. While this principle
seems straightforward, its application in practice entails
numerous problems and challenges, as market prices for
intra-group transfers, due to their idiosyncratic nature,
rarely exist (Chan and Chow, 1997; Collins and Shackelford,
1998; Oyelere and Emmanuel, 1998). Also, transactions
that appear similar are often financially different in terms
of underlying facts and circumstances (Chan and Lo, 2004,
p. 97; Eden et al., 2005). As stated in the OECD Guidelines,
‘transfer pricing is not an exact science’ (OECD, 2010, p. 29).
Instead, it often builds on judgments made from both MNE
and tax authority perspectives on how the arm’s-length
principle can be applied and documented in concrete and
often complex situations, since the MNE value chain often
lacks a sufficient degree of transparency. In addition to the
ambiguity that the arm’s-length principle constitutes in
itself, tax authorities in different countries tend to differ in
both regulatory standards of international transfer pricing
(Cools and Emmanuel, 2007) and the way such standards
are to be interpreted and applied by MNEs (e.g. Oosterhoff,
2006). This contributes to MNE uncertainty as to what
4
According to KPMG International (2011), more than 60 countries
worldwide have instituted laws and regulations regarding transfer pri-
cing.
 C. Plesner Rossing / Management Accounting Research 24 (2013) 175–194
constitutes tax compliant behaviour and hence increases
tax risks linked to international transfer pricing.
To sum up, MNEs are surrounded by a tax environ-
ment containing numerous transfer pricing-related risks
and uncertainties that need to be effectively managed and
addressed. This is necessary not only to reduce financial
risk in terms of double taxation and penalties for non-
compliance behaviour, but also in an attempt to limit
reputational risks when companies are exposed in public as
‘bad corporate citizens’ who do not leave a fair share of their
profit behind in their host countries (Mehafdi, 2000; Sikka
and Willmott, 2010). Although some attempts have been
made to stimulate cooperation between different tax juris-
dictions to avoid double taxation, e.g. the EU Arbitration
90/436/EEC (EU, 1990) and Article 25 of the OECD Model
Tax Convention, no globally agreed obligations to grant cor-
responding tax adjustments currently exist. Hence, double
taxation is a very real risk for MNEs, depending on the scope
and complexity of their intra-group trade.
3. Literature review and theoretical guidance
The literature on domestic transfer pricing has focused
on how transfer prices can be used as an MCS tool to
balance the trade-off between integration and differenti-
ation in decentralised organisations and serve as a tool
for managerial performance evaluation and reward (e.g.
Boyns et al., 1999; Colbert and Spicer, 1995; Eccles, 1985;
Perera et al., 2003; Spicer, 1988; Van der Meer-Kooistra,
1994; Van Helden et al., 2001; Watson and Baumler, 1975).
Conversely, the literature on international transfer pri-
cing often adopts a rather confrontational approach to
the topic. Specifically, previous studies have often used
financial accounting databases or confidential tax data
in an attempt to provide evidence of income shifting
and transfer pricing manipulation to exploit tax rate dif-
ferentials (e.g. Bartelsman and Beetsma, 2003; Clausing,
2001, 2003; Collins and Shackelford, 1998; Emmanuel
and Oylere, 2002; Grubert and Mutti, 1991; Harris, 1993;
Hines and Rice, 1994; Jacob, 1996; Klassen et al., 1993;
Langli and Saudagaran, 2004; Nichols and Conover, 2000;
Oyelere and Emmanuel, 1998; Rahman and Scapens, 1986;
Swenson, 2001). Some studies even imply that govern-
ments themselves play a role in income shifting through
transfer pricing, as they apparently use corporate tax rates
as a mechanism to compete for MNEs’ mobile profits
(Devereux et al., 2008). However, it has been questioned
whether the underlying data used to support the claim
of MNE non-compliance behaviour justify such claims
(Elliot and Emmanuel, 2000a). Instead, others have sug-
gested that tax management – whether compliance or
non-compliance-oriented – is just one of several objectives
defining an MNE’s transfer pricing strategy and practices
(Cravens, 1997; Cravens and Shearon, 1996; Elliot and
Emmanuel, 2000b). In addition, a number of account-
ing firm surveys (e.g. Ernst & Young, 2007) as well as
recent academic contributions (Cools et al., 2008; Cools
and Slagmulder, 2009; Elliot and Emmanuel, 2000a,b;
Oosterhoff, 2006; Plesner Rossing and Rohde, 2010) imply
that current international transfer pricing practices in
MNEs are driven by the aim of tax compliance, not income
177
shifting. Other survey-based studies (e.g. Borkowski, 2001)
have confirmed the compliance-oriented agenda in MNE
transfer pricing models by illustrating that even for intan-
gibles, which are often described as the most obvious
intra-group transfer for income shifting and aggressive
tax management (Clausing, 2003), a majority of MNEs
apply transfer pricing methods that have been suggested
by worldwide regulators and trade institutions. Other
static studies in the contingency-based research stream
have sought to identify organisational and environmen-
tal factors that determine the transfer pricing methods
and practices used by MNEs (Borkowski, 1990, 1992a,b,
1997; Chan and Chow, 2001; Chan and Lo, 2004; Chan
et al., 2006; Cravens, 1997). However, while these stud-
ies are valuable in the progress towards developing a
more comprehensive academic knowledge base on inter-
national transfer pricing, they cannot provide insights into
how and why international transfer pricing practices are
amended over time in order to effectively manage the
risks that the ambiguous tax environment imposes on
MNEs.
Notably, there are also a large number of static analytic
tax accounting studies (e.g. Baldenius et al., 2004; Halpirin
and Srinidhi, 1991; Hyde and Choe, 2005; Narayanan and
Smith, 2000) that seek to determine transfer prices which
meet both managerial and tax objectives at the same time.
However, these studies add little to the understanding of
how international transfer pricing is managed in a practical
real-life context. Based on the current literature, it is under-
standable that a number of researchers have called for
more case-based research to increase our understanding
of transfer pricing practices in MNEs (e.g. Cools et al., 2008;
Emmanuel and Mehafdi, 1994) and the way accounting and
tax is integrated in practice (e.g. Hanlon and Heitzman,
2010; Shackelford and Shevlin, 2001).
3.1. The guiding framework
Several MCS frameworks were evaluated in order to
identify a framework which could be considered suit-
able for guiding the current study. The increasing focus
on strategic control has led to the development of sev-
eral frameworks in the literature, e.g. Balanced Scorecard
(Kaplan and Norton, 1996), Levers of Control (Simons,
1995), and Otley’s control model (Otley, 1999), which
has been further developed in cooperation with Ferreira
(Ferreira and Otley, 2009).
This paper applies the LOC framework since that was
considered to be the most suitable MCS framework for
guiding the case study as well as organising case find-
ings. First, the LOC framework focuses strongly on strategic
issues and on its implications for the control system. This
includes not only looking at the controls employed but also
how they are used by companies (Ferreira and Otley, 2009).
Second, the LOC framework incorporates the four major
MCS functions for conveying and collecting information to
support implementation and refinement of a new strategic
direction. This includes an explicit control system to deal
with uncertainty (interactive control systems), which can
be seen as the key challenge to achieving tax goals such as
178 C. Plesner Rossing / Management Accounting Research 24 (2013) 175–194
Strategy as “Perspective”
Obtaining Commitment to the
Grand Purpose
BELIEF
SYSTEMS
Core
Values
Business
Strategy
Strategic
Uncertainties
INTERACTIVE
CONTROL
SYSTEMS
Strategy as
“Patterns in Action”
Positioning for Tomorrow
Fig. 1. The LOC framework.
minimisation of tax risk exposure. Fig. 1 illustrates the LOC
framework.5
Belief systems are formal systems that managers use to
define, communicate and reinforce the organisation’s basic
values, purpose and direction, and they take the form of
formal documents such as mission statements and state-
ments of purpose. Boundary systems are formal systems
that managers use to establish and communicate explicit
limits, rules and guidelines that must be respected. Diag-
nostic control systems are formal feed-back systems which
assist managers in monitoring and correcting deviations
from pre-set standards of performance. Interactive control
systems are formal systems used by managers to personally
and regularly get involved in the decisions and activities of
subordinates and staff specialists. Interactive control sys-
tems create debate and dialogue about emerging threats
and opportunities in the organisation’s environment which
could challenge the assumptions upon which the current
strategy and actions are based. So far, the LOC framework
has been applied in studying the role of MCS and busi-
ness strategy (e.g. Bisbe and Otley, 2004; Simons, 1994;
Tuomela, 2005). However, as the case will illustrate, LOC
5
The LOC framework in Fig. 1 is adapted from Simons (1995, p. 159):
‘Levers of Control’.
Strategy as “Position”
Staking Out the Territory
BOUNDARY
SYSTEMS
Risks to be
Avoided
Critical
Performance
Variables
DIAGNOSTIC
CONTROL
SYSTEMS
Strategy as “Plan”
Getting the Job Done
can also be used to illustrate and explain how MCSs are
influenced by functional strategies, e.g. a tax strategy.
3.2. Theoretical frame of reference
The theoretical platform used for explaining findings
and discussing implications of the study (Section 6) can
be seen as an interdisciplinary approach between con-
tingency theory reasoning and network theory at the
inter-organisational level.
Contingency theory is based on the premise that there
is no universally appropriate accounting or control sys-
tem that fits all organisations in all circumstances (Otley,
1980; see Chenhall, 2003, for a review). Instead, according
to contingency theorists, accounting and control systems
are continuously adjusted to fit the contextual changes
that occur in the organisation and its environment (Jones,
1985). The contingency approach thus implies that transfer
pricing practices differ between organisations depending
on the contextual circumstances. For example, changes in
the tax environment of MNEs will require adjustments to
existing managerial controls and accounting systems.
Network theory at the inter-organisational level has
been used in many different academic fields, includ-
ing sociology, political science and strategy, for studying
and explaining organisational behaviour. The funda-
mental logic of network theory when applied at the
 C. Plesner Rossing / Management Accounting Research 24 (2013) 175–194
inter-organisational level is that inter-organisational net-
work ties and their structure impact on organisational
behaviour and performance (e.g. Davis and Greve, 1997;
Strang and Macy, 2001). A network can be seen as a
set of nodes between individuals, work units or organi-
sations (Brass et al., 2004). In the simplest form, where
collaboration takes place between two individuals or
organisations, this can be labelled a ‘dyad’. Network
ties can have different levels of formality: formal ties
refer to ties that are structured, managed and regu-
lated for example through contracts, whereas informal
ties are characterised by being unstructured, unregu-
lated and lacking the well-coordinated, contractual nature
of formal ties (Powell et al., 1996). By entering into
various forms of inter-organisational networks, organi-
sations gain access to resources and capabilities that
would otherwise not be accessible to them (Gulati, 1999;
Gulati and Gargiulo, 1999). Such resources and capabili-
ties can enhance or maintain organisational performance,
given that sufficient organisational absorptive capacity
exists (Cohen and Levinthal, 1990). Specifically, the lit-
erature on inter-organisational networks identifies four
theoretical mechanisms that drive the existence of inter-
organisational network ties: access to resources, access to
information, access to markets, and access to technology
(Gulati et al., 2000). With regards to ‘information’, firms
are particularly found to be engaged in inter-organisational
collaborative relationships when they demand information
and knowledge that cannot easily be coded or stated in
written terms and hence are more effectively transferred
through personal information-sharing and interaction
(Powell, 1990). In general, network theory shares a feature
with contingency theory in the way that its basic premise is
that ‘structure matters’. The task of providing the ‘theory’,
i.e. explain how and why it matters under specific contex-
tual circumstances, is left to the researcher (Zaheer et al.,
2010).
4. Research strategy and design
The case study is guided by Eisenhardt (1989), Miles
and Huberman (1998), and Yin (2003, 2009). ‘How’ and
‘why’ research questions that do not require control of
behavioural events and focus on contemporary events are
most effectively answered through case-based research
(Yin, 2003, 2009). Moreover, the longitudinal case-study
design is useful for studying the same single case at two or
more different points in time, in order to gain insight into
how certain conditions and processes change over time
(Gephart, 2004; Yin, 2003).
The MNE under study was selected through theoreti-
cal sampling (Eisenhardt, 1989, p. 533). A number of MNEs
were contacted, and meetings were subsequently held with
tax and transfer pricing managers in four responding MNEs,
which were all considered sufficient compliance-oriented
in their transfer pricing practices. However, only one had
implemented a compliance-oriented tax strategy for inter-
national transfer pricing within the preceding two years,
which was considered a requirement in order to limit inter-
viewee recollection bias and collect the necessary archival
179
data. Consequently, this MNE was asked to participate, and
accepted.
In order to minimise errors and bias, a case study pro-
tocol was developed. The case study protocol consisted of
four parts: (a) a description of the case study project, (b) a
description of the data considered necessary and the rele-
vant sources from which these data could be expected to
be obtained, (c) a guide for the semi-structured interviews,
and (d) a section for analysis and structuring of collected
data. The collected data were analysed and organised in
a time-ordered matrix (Miles and Huberman, 1998). The
interview guide was prepared on the basis of preliminary
interviews with the corporate tax manager and the trans-
fer pricing manager as well as a thorough review of the
transfer pricing and MCS literature.
The case is based on a total of 26 interviews with 11
different employees, representing different functions and
managerial levels, in order to obtain different perspectives
on how the tax strategy impacted the MCS in the MNE
under study. 19 interviews were audio-recorded and tran-
scribed (15 h 40 min in total), and 7 interviews were carried
out as non-recorded/telephone interviews, with the excep-
tion of one telephone interview, which was audio recorded
and transcribed (3 h 40 min in total). With regards to non-
recorded/telephone interviews, notes were taken during
and immediately after the interviews to limit recollection
bias. Interviewees at the headquarters include the cor-
porate tax manager, the transfer pricing manager, three
tax department employees, one VAT employee, one con-
troller, one finance manager, and one HR manager. Finally,
two business unit finance managers were interviewed:
one represents a Europe-based production business unit,
the other a U.S.-based sales business unit. In addition to
the interviews, direct observation was carried out in the
tax department on several occasions. With regards to the
archival data set, it comprised the formal corporate tax
strategy, transfer pricing documentation files, intra-group
trade contracts, Power Point/Excel files used for internal
transfer pricing purposes, benchmark studies of compa-
rable independent companies, bonus programme data,
organisational charts, transfer pricing process descriptions,
and annual reports. The data material was coded to ensure
more accurate data analysis and synthesis of data (Miles
and Huberman, 1998). Specifically, archival and interview
data material was coded to identify what part of the MCS
analysis (i.e. what control lever/levers in the LOC frame-
work) it contributed to. For example, in the tax strategy
document and interview transcripts, certain paragraphs
were marked with a ‘DCS’ when data involved informa-
tion on ‘Diagnostic Control Systems’. This allowed for more
effective data analysis and triangulation to enhance inter-
nal validity.
Data collection took place from August 2008 to April
2012. The full time span of the study and the collected
data covers the period January 2005 to April 2012. Hence,
the case study can be classified as being partly longitudi-
nal, partly historical. In terms of Yin’s classifications, this
case study is fundamentally ‘exploratory’ but also includes
‘explanatory’ features, as it seeks to explain the complex
causal links identified between a tax strategy and the MCS
in a multinational setting.
180 C. Plesner Rossing / Management Accounting Research 24 (2013) 175–194
Finally, due to the sensitivity that surrounds inter-
national transfer pricing, the MNE’s identity has been
concealed, and in the following it will be called ‘Global’.
This is a common feature of transfer pricing case studies
(e.g. Colbert and Spicer, 1995; Cools et al., 2008; Cools and
Slagmulder, 2009; Perera et al., 2003; Plesner Rossing and
Rohde, 2010; Van der Meer-Kooistra, 1994).
5. Case analysis and results
The MNE under study is a Europe-based MNE (in the fol-
lowing: Global) in the high-tech manufacturing industry. It
has business activities worldwide and engages in signif-
icant intra-group cross-border transfer activities. The tax
department at headquarters, which served as the research
site, manages all tax risk management activities, including
those related to international transfer pricing.
The following sections present how the MCS was
influenced by the tax strategy in order to support top man-
agement’s focus on tax risk management, with Fig. 1 as a
frame of reference. Each section represents one lever in the
LOC framework, the aim being to arrive at a comprehensive
yet distinct understanding of the topic.
5.1. Defining the MNE direction of international transfer
pricing (belief systems)
In 2006, Global’s top management became aware of
increasing regulatory pressure on MNE international trans-
fer pricing practices. More and more countries, including
the country hosting Global’s headquarters, began setting
more detailed regulatory standards of how MNEs were
to determine/document their transfer pricing practices. At
the same time, tax authorities worldwide were intensi-
fying their audits of MNE transfer pricing practices, and
on several occasions, significant income adjustments were
imposed on a number of MNEs.6 These adjustments were
problematic from a general MNE perspective, as they led
to double taxation in cases where the corresponding tax
jurisdiction refused to adjust the tax income statement
accordingly. Moreover, in many cases such adjustments
also led to negative press publicity which exposed spe-
cific MNEs as ‘tax evaders using local resources without
contributing to society’.
Since international transfer pricing had so far not been
given significant attention at top management level in
Global, top management needed to determine what posi-
tion it wanted to take on international transfer pricing. In
other words, top management had to decide where on the
tax compliance/non-compliance continuum it wanted to
position the group companies and hence what level of risk
it was willing to accept in case of transfer pricing audits. The
corporate tax manager, who is part of the top management
group at headquarters and responsible for tax and transfer
pricing matters, commented on the fundamental core val-
6
See Sikka and Willmott (2010) for examples of MNE income adjust-
ments that have received media coverage, often presenting and naming
specific MNEs as tax evaders through what the press considers unethical
transfer pricing practices.
ues and intentions in Global that basically determined the
strategic position the top management decided to take on
international transfer pricing:
‘. . .we (Global) have to be in compliance and want to be
in compliance. . ..we comply with the rules that exist
in the areas where we operate – and it is not only
with regards to tax, it concerns everything basically. . .’
(October 2008).
However, it was soon realised that implementation of
a tax strategy for international transfer pricing could not
effectively be carried out by the employees and managers
working in Global’s tax department back in 2006, as their
understanding of the regulatory requirements for interna-
tional transfer pricing was too limited. Therefore, several
people specialising in international transfer pricing and
taxation were hired in order to ensure that the human
resources necessary for tax strategy implementation were
in place. Specifically, in addition to the corporate tax man-
ager, the new and competent tax department staff group
included a transfer pricing manager and several staff with
experience in international taxation, accounting and value
added tax (VAT).
The new tax strategy was initially communicated
through informal instructions to key employees and was
then put into more formalised written terms in order to
convey it in a more organised manner to relevant orga-
nisational parties, primarily business unit managers and
tax department staff. During the development of the tax
strategy, several visits to business unit sites were car-
ried out, most often by the transfer pricing manager and
occasionally by the corporate tax manager. At these visits,
the transfer pricing manager and corporate tax manager
would collect data for the subsequent development of
transfer pricing documentation. In addition, they would
take the time to carefully outline the logic of the new tax
agenda and explain to business unit managers why strict
adherence to the formal principles developed by the tax
department and communicated downwards was crucial
for tax compliance purposes. The corporate tax manager
commented on the importance of a more formalised tax
strategy:
‘Our tax strategy have never been formalised and stated
in written terms. . .I know what the attitude is at top
management level with regards to tax, but it has never
been formalised what it is we do and what goals we
work towards. . .what [tax] objectives do we want to
achieve and how do we want to achieve them?. . .now
we are working very goal-oriented. . .’ (Corporate tax
manager, December 2009)
An 18-page tax strategy document was eventually
drafted by the corporate tax manager and the transfer
pricing manager and subsequently approved by the chief
financial officer (CFO). Business unit managers were not
involved in this process at any stage. The introduction to
the document stated its general objective:
‘The objective of this guideline is to formalise the
business procedures concerning Tax, Transfer Pricing
and VAT, and to describe the requirements relating to
 C. Plesner Rossing / Management Accounting Research 24 (2013) 175–194
compliance for entities and BUs (business units) within
[Global]’.
‘Furthermore, the objective of the guideline is to give
Group companies a better understanding of the require-
ments for handling of Tax, Transfer Pricing and VAT’.
(Introduction, Tax strategy document, June 2009)
Besides outlining the objective of the formal tax strat-
egy document, the document explicated the position on
tax that top management in Global was aiming for, i.e. tax
compliance. This was important to educate both tax depart-
ment staff and lower-level managers at business unit level
about top management’s focus on tax risk management.
Moreover, it helped clarify to business unit managers that
the tax department was formally in charge of all tax mat-
ters, regardless of where in the organisation they occurred.
Below are stated some key points from the tax strategy
document that was used to communicate the new formal
approach to international transfer pricing:
‘[Global] will comply with all tax regulations in all
countries in which we operate. The aim is that all tax
returns and supplements are submitted by their due
date and in line with local tax law. The tax department is
responsible for ensuring that all inter-company transac-
tions are on arm’s length terms in order to comply with
the international standards on transfer pricing. . .’
(Introduction, Tax strategy document, June 2009)
The written tax strategy document not only served to
inform tax department staff and business unit managers
about the new strategic agenda for tax and transfer pricing;
its approval by top management and the supervisory board
was also helpful to the tax department. The reason was
that it could assist in facilitating compliance at business
unit level with the new initiatives and actions that were
carried out by the tax department and communicated in a
top-down manner to business units:
‘There is no doubt that it (the tax strategy document)
gives me more legitimacy. I do not meet significant
resistance. . .there is no-one who questions what we
[the tax department] are doing. There is no doubt that
when I sit down with a business unit manager and say:
this is what I want and it concerns your business unit
in this and this way, it makes it easier for me that I can
show him a document where it says that it is supported
by [Chief Executive Officer] and [Chief Financial Offi-
cer] and the supervisory board. . .then we don’t have to
discuss it. . .’ (Corporate tax manager, December 2009)
5.2. Communicating limits, rules and guidelines of
accepted behaviour (boundary systems)
The new strategic agenda for international transfer pri-
cing stating that all intra-group transactions were to be
conducted in accordance with the arm’s-length princi-
ple required several initiatives aimed at reducing transfer
pricing tax risks. The formalised tax strategy document pro-
vided explicit insight into the transfer pricing risks that
top management had identified. These risks included one
181
obvious risk related to double taxation and fines from
transfer pricing audits (Tax strategy document, section on
‘financial risks’, June 2009), but also a less quantifiable risk
concerning the way Global was perceived by its stakehold-
ers:
‘[Global] does not want its tax affairs to appear in the
public domain. [Global] will manage its compliance
affairs to minimize the risk of any public comment’. (Tax
strategy document, section on ‘Reputational risks’, June
2009)
The transfer pricing manager confirmed the statements
put forward in the formal tax strategy document that the
new strategic agenda of tax compliance was not only driven
by double taxation risks, but also by the aim of avoiding rep-
utational risks that would be triggered through for example
media exposure:
‘We will avoid [transfer pricing] penalties and we will
not be on the front page – that is one hundred per cent
sure’. (Transfer pricing manager, October 2008)
The goal of ensuring that all international transfers
were priced and documented according to the arm’s-length
principle required that a set of more detailed rules and
guidelines for international transfer pricing in Global was
established to supplement the more general statements
that were laid down in the new tax strategy document.
More detailed instructions were important for multiple
reasons: first, they were necessary to guide tax depart-
ment staff about the domain in which they were expected
to come up with ideas and new initiatives that would sup-
port the new strategic agenda. Second, they were necessary
to inform business unit managers about the new behaviour
that was expected of them, since business unit managers
had previously had some influence on intra-group pricing
decisions and had generally played a more liberal role in
terms of tax issues. With regards to guiding the transfer
pricing manager and tax department staff who played a
key role in implementing the new strategy, the tax strategy
document stated:
‘All positions taken in the tax returns must be support-
able and, on the balance of probability, be more likely
than not to be agreed by the appropriate tax authority’.
‘The tax department will aim to have no adjustments
to the tax returns’. ‘Group Tax will take a conservative
position in respect of the tax charge in the accounts’.
(Tax strategy document, section on ‘Compliance’, June
2009)
Furthermore, the tax strategy document explicated that
neither members of the tax department nor business unit
managers were allowed to set up any transactions that
were purely tax driven; instead all transactions had to be
driven by a business purpose. This confirmed the state-
ments from interviewees that Global wanted to ensure that
a conservative approach to international transfer pricing
was taken by all organisational members to limit the multi-
dimensional risks, i.e. financial and reputational risks, from
transfer pricing audits. In addition, it was stated in the
tax strategy document that business units were no longer
182 C. Plesner Rossing / Management Accounting Research 24 (2013) 175–194
allowed to engage in business activities that had potential
tax implications without involving the tax department at
headquarters. Specifically, it was stated that:
‘All transactions must have a business purpose. All
decisions in [Global] must be based on the underlying
business and not on internal tax sub optimization. The
Group will not undertake nor accept purely tax driven
transactions’.
‘All transactions must be in line with the arm’s length
principle – as described in the defense files (written files
documenting arm’s-length transfer pricing)’.
‘The tax department must be involved whenever a
transaction has possible tax implications, e.g. business
or share acquisitions, setting up new entities, changes
in corporate structure, cross-border arrangements and
activities, property transactions, appointment of new
tax advisors, other relevant tax issues’.
‘The tax department must be involved in not only the
planning of the transactions but also in the imple-
mentation and documentation of each transaction. The
responsibility of handling the overall tax planning,
strategies and execution is solely placed in the tax
department’.
(Tax strategy document, section on ‘Transactional key
areas’, June 2009)
All the various limits, rules and instructions conveyed to
business unit managers led to a formal reduction in com-
mercial flexibility at business unit level. They were driven
by the fact that top management and tax department staff
considered it too risky to let business decisions with tax
implications be handled at business unit level if the tax
compliance strategy was to be effectively implemented.7
A comment from the transfer pricing manager illustrated
an important reason for why such strict boundaries were
placed on business unit managers:
‘They have no idea in business units about what is
required to be in compliance’ (October 2008)
Instead, the tax department was as of that moment in
charge of implementing the new tax strategy and of coming
up with new ideas and initiatives in the domain explicated
in the new tax strategy document. As stated by the corpo-
rate tax manager:
‘What I try to do is to give them [tax department staff]
some guidelines and outline our [tax] strategy and poli-
cies and define what initiatives we can potentially bring
in under that umbrella’. (December 2009)
5.3. Monitoring new business unit performance targets
(diagnostic control systems)
Top management and tax department staff now had
to evaluate how the new tax strategy for international
7
Section 5.3 explains in further detail why these restrictions on busi-
ness unit managerial autonomy were necessary in order to minimise tax
risks in Global.
transfer pricing was actually to be planned (ex ante),
and how the achievement of strategic success was to be
measured (ex post). Based on transfer pricing regulatory
standards, one of the first initiatives carried out as part
of this process was a comprehensive analysis of Global’s
value chain, i.e. a functional analysis.8 The transfer pri-
cing manager and tax department staff worked closely
together with transfer pricing consultants on identifying
in depth the functions and risks that existed in group com-
panies involved in intra-group cross-border transfers. In
practice, the functional analysis consisted of numerous
intensive talks between the tax department staff, transfer
pricing consultants and business unit managers/business
unit finance managers/business unit controllers. These dis-
cussions could be considered purely as a data collection
process where the tax department staff and transfer pri-
cing consultants would gather feedback from subordinates,
but without engaging in actual, detailed discussions about
how this information was to be used for transfer pricing
purposes. Instead, the feedback was used for subsequent
high-level discussions in the tax department and during
meetings with transfer pricing consultants to determine
which transfer pricing practices could be considered to
be in line with the tax strategy. The reason why func-
tional analyses were conducted for all these companies on
a yearly basis was that functions performed, assets used
and risks assumed were considered as being of a dynamic
nature. Any changes in business unit functions and risks
could potentially undermine the transfer pricing practices
applied, in particular the size of profit margins applied
at business unit level (see below for more details). The
functional analysis provided the information necessary to
determine what transfer pricing method was to be used and
hence how business unit performance planning and moni-
toring were to be carried out. Ultimately, it was decided to
apply the transactional net margin method9 with operating
margin or net cost plus margin as the profit level indicator.
Hence, the next step in the planning process was to collect
data on profit margins from comparable independent com-
panies, so-called ‘benchmark studies’. These benchmarks
would then serve as profit targets for the foreign business
unit companies in Global and hence as the new key perfor-
mance indicators for monitoring whether the tax strategy
8
A functional analysis can be seen as an analysis of the functions car-
ried out, the assets used and the risk assumed by a corporate legal entity
involved in intra-company cross-border trading with another legal entity.
This analysis is a pivotal part of documenting the transfer prices and/or
profit margins applied for tax compliance purposes, as it provides a plat-
form for determining the price or profit that an independent party would
expect for a similar transaction under similar circumstances. The data
from similar independent companies (often named ‘comparables’) can be
found in commercial accounting databases, e.g. AMADEUS, Compustat.
For more insight into commercial databases that can be used for transfer
pricing purposes, see for example Cools (1999).
9
The TNMM-method compares the net profit margin of a taxpayer
arising from a non-arm’s length transaction with the net profit margins
realised by arm’s-length parties from similar transactions (OECD, 2010).
It is an indirect method, as it does not directly examine transfer prices
but instead builds on the assumptions that if a group company reports
profits similar to those of independent companies, the transfer prices will
represent arm’s-length terms. This reasoning has led to the invention of
the term ‘arm’s-length profit’ (see for example Picciotto, 1992).
 C. Plesner Rossing / Management Accounting Research 24 (2013) 175–194
was on track. Notably, the collection of benchmarks was by
far no easy task. On the contrary, Global had some difficul-
ties identifying comparables that could serve as a basis for
the profit margins applied to its business units:
‘It can be hard to collect benchmarks. . . For example
in Asia it is difficult to benchmark our companies and
it’s even more difficult in the Australian continent. . .’
(Transfer pricing manager, April 2009)
Specifically, a tax department employee reported that
it was considered difficult to identify independent compa-
nies undertaking similar functions and assuming the same
risks as Global. While some external companies were ini-
tially identified, they were often companies enrolled in
an MNE group and hence not suitable for benchmarking
purposes. The benchmark studies reviewed confirmed this
difficulty in identifying suitable comparables.10
Specifically, the benchmarking task was outsourced to
external transfer pricing consultants. Consultants then did
a search for comparables in specific regions and calcu-
lated inter-quartile ranges11 and medians on operating/net
margins from independent companies that were applied
to business units in accordance with the TNMM-method.
While the benchmark studies were outsourced due to the
significant experience held by external transfer pricing
consultants in such matters, this was also done to signal
that tax compliance was taken seriously by Global:
‘We could probably employ someone to do bench-
marking much cheaper, but it wouldn’t have the same
signal value as when it has their [accounting firm] stamp
on the report. So in a way we use their name to show
[tax authorities] that we want to be in compliance and
do things as correctly as possible. . .’ (Transfer pricing
manager, October 2008)
One result of the new tax strategy was that the top
management/tax department much more often during
the year focused their attention on actual profit mar-
gins. In order to ensure that the tax department did
not lose control of business unit profit margins, profit
reports were more frequently extracted from the account-
ing system by the accounting department at headquarters
and presented to the corporate tax and the transfer pri-
cing manager. They would then evaluate the reports and
look for deviations from the pre-planned business unit
profit targets considered to be at arm’s length. Hence,
the tax compliance-oriented profit margins basically pro-
vided benchmarks for identifying problems linked to the
tax strategy and the goal of minimising tax risk exposure.
When business unit profit margins were off compared to
the pre-determined target, the corporate tax manager and
the transfer pricing manager would discuss what might
10
OECD Transfer Pricing Guidelines do not take a position on how
many comparables are necessary for the sample to be statistically
valid. For Her Majesty’s Revenue & Customs’ position on this, see:
http://www.hmrc.gov.uk/manuals/intmanual/.
11
The inter-quartile range is particularly appropriate where the trans-
actional net margin method is applied (OECD, 1995, I-19). It contains one
half of the total frequency and represents the variate distance between
the upper and lower quartiles (OECD, 2002).
183
have caused the deviation, and business unit managers
would normally be asked to provide their insight and expla-
nations. For example, it could be that certain risks had
materialised at business unit level, causing reported profits
to be lower than expected, or that the business unit had
performed more functions than planned for that specific
accounting period and hence incurred more costs. After
determining the extent of deviations and their underly-
ing reasons, the corporate tax manager and transfer pricing
manager would decide what would be the most appropri-
ate action in view of the compliance-oriented tax strategy.
Business unit managers were reported as being kept out
of this discussion, illustrating the top-down approach
that emerged through the tax compliance process. On
many occasions, the tax department decided to perform
a year-end adjustment to the specific business unit’s
income statement in order to bring the business unit’s
reported profit margin back to the profit target for that
specific accounting period. These year-end-adjustments
were made by issuing new intra-group invoices or credit
notes that would bring business units with deviating profit
margins back to their pre-determined profit targets. In
sum, the emphasis now placed on achieving profit tar-
gets considered at arm’s length with reference to external
comparable industry actors/competitors helped convey the
new strategic direction of international transfer pricing and
the inherent tax risk focus, both to tax department staff and
to business unit managers.
With regards to performance rewards and bonuses for
the tax department staff and the transfer pricing man-
ager in charge of tax risk management, Global continued
to apply a set of financial measures that were linked to
growth and economic value.12 At a later stage, the cor-
porate tax manager was also evaluated on a number of
subjective process-related performance measures linked
to Global’s tax strategy initiatives. These measures were
determined in collaboration with the CFO and included for
example ‘Development in APA13 process with tax author-
ities’ (Corporate tax manager, April 2012). In addition
to monetary rewards, the transfer pricing manager and
tax department staff might also receive non-monetary
rewards in the form of promotion, recognition and new
job opportunities within the group. Notably, a significant
12
Top management should ensure that KPI for MNE tax specialists are
carefully aligned to tax objectives. Other measures linked to tax than
‘growth’ and ‘economic value’ could be considered. As pointed out in
recent work (Armstrong et al., 2012, p. 393), there are more direct meas-
ures of tax manager effort than cash flow or earnings objectives when the
tax manager’s primary responsibility is tax compliance. With regards to
this, a survey of performance measures used to evaluate tax departments
reports that the top-3 performance measures used to evaluate tax depart-
ment performance are ‘Lack of surprises’ (71%), ‘Results of audits’ (61%),
and ‘Staying with department budget’ (56%), For a complete list of perfor-
mance measures used to evaluate tax departments, see ‘Tax Executives
Institute: Corporate Tax Department Survey’ (Tax Executives Institute,
2005, p. 61).
13
Advance Pricing Arrangements (APA). An APA is an arrangement that
determines, in advance of controlled transactions, an appropriate set of
criteria (e.g. method, comparables and appropriate adjustments thereto,
critical assumptions as to future events) for determining the transfer pri-
cing for those transactions over a fixed period of time (OECD, 2010, Section
F.1, 4.123).
184 C. Plesner Rossing / Management Accounting Research 24 (2013) 175–194

non-monetary recognition/reward was given to the trans- – the tax and, you know, the financial folks out in the
fer pricing manager during the case study for his effort, business. We both understand the goals. . .’ (Business
skills and commitment towards implementing the new tax unit finance manager, April 2012)
strategy.
With transfer pricing becoming an exercise managed
It should be stressed that with regards to Global’s foreign
centrally by the tax department, business unit managers’
investment decisions, the tax department played a form of
possibilities for controlling financial results were reduced.
advisory role, assessing tax consequences of specific alter-
However, the significant historical and current use of a
native investment opportunities as a means of integrating
variety of process-related key performance indicators in
potential tax concerns in business decisions. Specifically,
Global,15 as well as group-based financial performance
they were required to perform a tax risk evaluation in
indicators in bonus programmes for business unit man-
relation to significant investment considerations, but they
agers (annual reports, 2007–2011; ‘Bonus programme’,
were not as such the final decision-maker in business strat-
2011) seemed to mediate the significant tensions that could
egy decisions. On several occasions it was stressed that
otherwise have been expected.
Global’s investment and business decisions were driven by
business strategy – not opportunities for tax gains or tax Our bonuses [at business unit level] are primarily driven
optimisation14 : by our performance at group level. . .and then we have
specific metrics at the SBU level, but they are not P&L
‘It is not tax that drives this business – it’s the business.’
driven. . .’ (Business unit finance manager, April 2012)
(Transfer pricing manager, April 2009)
Also, the awareness in the tax department of the impor-
As illustrated above in Section 5.2, the strict formal
tance of gaining lower-level acceptance of tax-related
boundaries set up to ensure that business units did not
initiatives through frequent site visits and explanation of
engage in any activities that did not match the tax initia-
the logic underlying the top-down nature of tax initiatives
tives, including achievement of targets from benchmark
was considered to play a crucial role in reducing potential
studies, caused a significant formal reduction in busi-
tension at business unit level over tax initiatives:
ness units’ commercial flexibility. However, at business
unit level, these strict formal rules were not reported as ‘I can tell them [BU managers] why we do as we do and
being major obstacles to business activities and did not make the process easier by saying: ‘we are adjusting you
cause major dissatisfaction at business unit level (Busi- [i.e. the EBIT margin] to avoid this and this [e.g. dou-
ness unit finance manager, September 2009). In relation ble taxation] and it means this for the whole group’. . .if
to this, at the end of 2009 Global started feeling the con- I just, without any notification gave them a bill of
sequences of the financial crisis, such as reduced product 10 million Euro at the end of the year [i.e. year-end-
demand from external customers and new competitors adjustment] they would go crazy. . .we at headquarters
who introduced products at significant lower prices. This have to give them an explanation and understanding of
put pressure on the transfer pricing system, as sales why we do as we do and why it is important that it gets
business units increased their demand for discounted done. . .’ (Transfer pricing manager, April 2009)
intra-group transfers (Tax department employee, April
‘You know it’s very similar to previous companies I
2012). The argumentation put forward by local project
have worked for. . .it’s a very consistent procedure and
managers was that pre-calculations using current transfer
a common approach for most multinationals to man-
prices showed substantial deficits in relation to concrete
age their tax exposure to a region via a transfer pricing
business projects. In many cases, the tax department would
mechanism. . .From what I have seen from our [local]
deviate from the pre-set transfer prices for such specific
management team, they understand the reason for
business projects. However, it was stressed that this would
transfer pricing and why our EBIT is managed to that
only be accepted by the tax department after a thorough
level. . .I can’t think of any other way of doing it – it
test of the pre-calculations provided by sales business units
needs to be managed centrally and coordinated. Oth-
(Internal process description: ‘Transfer pricing discounts’,
erwise, I think it would quickly get out of control’
April 2012). This was to ensure that any changes in transfer
(Business unit finance manager, April 2012)
prices could be justified and documented from an arm’s-
length perspective – for example that certain risks which
were not to be borne by sales business units had mate- 5.4. Interaction and learning about tax environment
rialised (Tax department employee, April 2012). Overall, uncertainties (interactive control systems)
the collaborative attitude in the tax department seemed
to reduce potential tension at business unit level that may The numerous initiatives that were carried out to plan
have been caused by the formal restrictive controls: and monitor the new tax strategy increased the corpo-
rate tax manager’s confidence that Global’s transfer pricing
‘We have no challenges asking for a special discount on
practices were now better aligned with the tax compliance
a project-to-project basis. . .and we have seen a bit of
objective. However, it soon became clear to the corpo-
that over the last year. . .I think we work well together
rate tax manager that the dynamic and quite complex

14 15
See Glaister and Hughes (2008) for a study of U.K. MNEs which con- The type of process-based/non-financial KPIs differed across Global,
firms that strategic decisions take priority over tax decisions. but they were a significant part of any business unit’s bonus programme.
 C. Plesner Rossing / Management Accounting Research 24 (2013) 175–194
tax environment that Global was facing, as well as the
numerous uncertainties it comprised, called for his close
personal interaction with the transfer pricing manager and
tax department staff. For example, during the implemen-
tation of the new strategy, many countries introduced new
transfer pricing regulations or changed their interpretation
of the current rules, which forced MNEs in general to adjust
their transfer pricing practices accordingly.
‘It is not certain that it [a transfer pricing set-up] con-
tinues to work because there can be things who change
over time such as new transfer pricing regulations –
that can change the situation’ (Transfer pricing man-
ager, April 2009)
Also, a number of tax authorities primarily in Eastern
Europe and Asia were found to increase their expertise in
the field, leading to changes in their behaviour and inter-
pretation of current regulations. This put pressure on Global
and called for some kind of more formal use of interac-
tive control between the corporate tax manager and the
tax department, to allow them to discuss whether the
assumptions and decisions behind current international
tax and transfer pricing practices were aligned with emerg-
ing changes and uncertainties in the tax environment.
‘Transfer pricing is not an exact science – the tax author-
ities can have a different point of view. . .nothing in this
world is certain’ (Corporate tax manager, June 2009).
‘Transfer pricing is a grey mass. . .you can never get a
[tax compliance] guarantee besides an APA. . .’ (Transfer
pricing manager, December 2009)
The corporate tax manager therefore decided to organ-
ise a weekly group meeting to discuss international transfer
pricing and international tax matters with the transfer pri-
cing manager and tax department staff. In addition to the
formalised group meetings, the corporate tax manager also
sought to have face-to-face discussions at individual level
about changes or new insights into the tax environment
that the transfer pricing manager and each tax department
employee had encountered:
‘I try to take time to sit down with them on an individual
basis and ask them: what kind of things is going on,
what do you see with regards to what you are doing?’
(Corporate tax manager, December 2009)
However, at one point the corporate tax manager came
to the conclusion that his interaction with the transfer pri-
cing manager at the group meetings and during the more
informal interaction that took place between them on a
daily basis was lacking in quality. The reason was that the
transfer pricing manager was rapidly improving his general
understanding of the complex and ambiguous tax envi-
ronment that Global were facing. In relation to this, the
corporate tax manager was also aware that whereas the tax
department staff members were skilled in general interna-
tional taxation, as time progressed they were not to the
same extent able to interact with the transfer pricing man-
ager or contribute with new ideas about how Global should
respond to transfer pricing related changes in the tax envi-
ronment. Notably, at the same time, Global was in a growth
185
phase that involved entering several new markets in Asia,
USA and Russia, where the company was confronted with
new and changing tax regulations as well as a lack of under-
standing of the way local tax authorities assessed various
transfer pricing practices. This further increased the need
for the transfer pricing manager to engage in more in-
depth and high-level discussions on how to assess and
respond to the dynamic tax environment Global was fac-
ing in an increasing number of countries. With regards to
this, during the initial tax strategy implementation phase,
the corporate tax manager had become aware of an inter-
organisational network group in which specialised transfer
pricing and tax managers employed at different MNEs
would meet regularly four times a year. At these meet-
ings, the managers would share various experiences with
the tax environment and discuss transfer pricing-related
uncertainties at a highly specialised level, for example how
new regulations or regulatory changes in certain countries
or regions were to be interpreted and applied in a practi-
cal context, or how specific transfer pricing problems could
potentially be handled. The corporate tax manager encour-
aged the transfer pricing manager to consider whether
his participation in the inter-organisational network group
could offer him a forum for more valuable interaction
and knowledge sharing on international transfer pricing,
hoping that this would also contribute to more valuable
face-to-face interaction and decision-making at the intra-
organisational (intra-group) level.16 Soon after, the transfer
pricing manager joined one of two existing network groups.
The corporate tax manager commented on why the transfer
pricing manager needed inter-organisational collaboration
with other transfer pricing and tax specialists to bet-
ter be able to generate new ideas and learn about what
adjustments were potentially necessary to Global’s current
transfer pricing practices for tax compliance purposes:
‘I can’t discuss with a transfer pricing manager. I can
know what they work on and give guidelines, but
if they need the professional discussions we have to
get it from outside. . .He can get some knowledge and
inspiration. . .what I can bring to a discussion with him
is not detailed – it is merely the broader guidelines and
principles. . .So if he needs some professional discuss-
ions, he has to get it from somebody who also works
full-time with transfer pricing’. (December 2009)
The transfer pricing manager also commented on
why inter-organisational collaboration was necessary to
more effectively identify and discuss emerging regulatory
changes and transfer pricing-related threats from the MNE
tax environment:
‘Transfer pricing is very specialised. . .It is more high-
level in these groups. . .the discussions are from a
transfer pricing technical point of view at a much higher
level than they would be here in the [tax] department
16
Notably, the inter-organisational interaction at these network meet-
ings should not be considered ‘interactive control’. Rather it can be seen as
an interactive process that stimulates and fuels the intra-organisational
interactive control between the corporate tax manager and the transfer
pricing manager.
186 C. Plesner Rossing / Management Accounting Research 24 (2013) 175–194
– it’s a specialist job. . .it gives a lot of value to the
people in the [network] group. We have to have some
form of professional network. [In the network group]
you can have unofficial discussions about the problems
that relate to transfer pricing and that all [members]
deal with. . .After all, there are not many in [country
of HQ location] who work with operational transfer
pricing. . .there can really be several good reasons for
being part of such a network. If for example one [mem-
ber] has experienced a problem that potentially could be
a general problem, then we discuss it. . .we always take
turns (at network meetings) and present what is going
on in the different companies and then we just talk from
there. We try to bring out as much information as pos-
sible to make it work. There is a lot of inspiration in this
– it is an inspiration and experience network. . .there is
some learning in this, no doubt about that’. (Transfer
pricing manager, April 2009)
Specifically, the network group consisted of tax and
transfer pricing managers representing a variety of
European-based MNEs operating in many different indus-
tries. The overall objective was to share insights on transfer
pricing from the MNE tax environment as well as to dis-
cuss how MNEs could effectively respond to emerging
transfer pricing regulations and changing tax authority
behaviour. The network was not reported as being a
response to fiscal authorities’ strengthening information
exchange agreements.17 Rather, they seemed to emerge
out of the recognition that collaboration was necessary to
increase learning and reduce tax uncertainty.
Specifically, the networks were in some aspects orga-
nised rather formally, with a set of statutes outlining the
proceedings of network meetings, including adherence
to the importance of confidentiality. Each member was
required to sign the statutes to stress the rules of the
network. If statutes were violated by a member, in partic-
ular confidentiality matters, this MNE would be expelled
from the network group. Membership could be obtained
by contacting the group who then discussed whether mem-
bership should be granted or not. Minimum requirements
for even being considered were that an applicant had to
be employed at an MNE, and that his/her primary tasks
should involve international transfer pricing. The size of
the network increased steadily over the period of study and
had 10 members on average. No minimum requirement in
terms of MNE size existed. A procedure was established
where the members took turns at hosting network meet-
ings. Network members were not allowed to bring guests,
for example colleagues, due to the importance of ensuring
confidentiality. The transfer pricing manager commented
on the experiences and information that were shared at the
interactive network group meetings in order to reduce tax
uncertainty:
17
See for example the OECD Seoul Declaration, where heads from 35
tax administrations agreed to work together to solve problems linked
to international non-compliance with national tax requirements. Other
examples of tax authority collaborations are the Joint International Tax
Shelter Information Centre (JITSIC) and various forms of tax information
exchange agreements with tax-haven countries.
‘It can be experiences with [transfer pricing] set-ups
that look like the ones we have, in order to get a sec-
ond opinion besides the one from the advisors. . .In that
way the network groups are very important. . .It is also
used as an indicator. For example, we discuss: we are
in this and this situation – does anyone have some-
thing similar? And then someone would say: ‘yes, we
have something that looks like that and we approached it
this way’, and then you know what way to go’. (Transfer
pricing manager, April/December 2009)
Furthermore, network meetings also included inputs
relating to e.g. what profit margin level specific tax author-
ities considered acceptable for specific types of business
units, depending on business unit function and risk profile.
It could also involve sharing information on what specific
tax authorities appeared to be changing their demands
for benchmark studies, for example towards demanding
country-specific benchmark studies instead of benchmark
studies covering more extensive regions. Or it could involve
what volume of intra-group trade would make tax author-
ities ask for local benchmarks as part of the MNEs’ transfer
pricing documentation. Also, the network group meetings
could involve debates on how to respond to tax authori-
ties that were found to become increasingly aggressive on
transfer pricing audits as they were improving their skills
on how to evaluate MNEs’ transfer pricing practices, e.g.
in Asia and Eastern Europe. Moreover, the network group
discussed intensively how to respond to the downturn in
the global economy from a transfer pricing point of view,
including how and to what extent business unit profit tar-
gets and reported business unit profits were to reflect the
poor economic situation from an arm’s-length perspec-
tive. For example, it was discussed whether limited-risk
production business units (so-called ‘toll/contract manu-
factures’) should incur losses, i.e. negative taxable income,
during an economic recession, or if the parent company
(i.e. the principal company in a principal structure) should
be the only company of an MNE which incurred losses
during an economic downturn. The issue of pricing col-
lusion was not reported as being on the agenda at the
network meetings. In fact, the transfer pricing manager
stated that this had never been suggested by any member
(April 2012).
Less technical issues were also addressed at these meet-
ings. For example, network group members (i.e. MNEs)
that were entering new markets were interested in other
members’ experiences as to what consultancy firms were
considered to provide the best assistance in specific
regions. After network group meetings, the transfer pricing
manager would go back and discuss the most important
inputs with the corporate tax manager, and together they
would decide how these inputs could be used or devel-
oped into initiatives that could potentially improve Global’s
current transfer pricing set-up and practices.
Notably, despite its perceived value for reducing tax
uncertainty and achieving tax goals, the transfer pricing
manager’s inputs from network meetings were not secured
by the MNE, e.g. entered into some form of knowledge
management system. The reason was that the transfer
pricing manager considered such tasks to be too time
 C. Plesner Rossing / Management Accounting Research 24 (2013) 175–194
consuming and that he generally lacked a personal incen-
tive to do so.
Moreover, a more frequent amount of less formalised
interaction across MNE boundaries also emerged over time.
In many cases – on average once a month – the transfer
pricing manager of Global contacted transfer pricing man-
agers in other MNEs to discuss on a one-to-one basis how
to approach specific transfer pricing problems most effec-
tively for tax risk management purposes:
‘If I need more input, there are at least 4 or 5 people
in the [network] group that I would consider giving a
call and say: listen, I need some help on this – do you
have an hour or two, and then I will drive down and
visit them and discuss it. . .but we also work together
across these experience groups. If I know there is a guy
in one of the other groups who works with something
that we can use, then I would certainly consider giving
him a call and say: listen, lets share some knowledge –
we need insights into what you do – if you at any point
in the future should need input from us, we are always
available. . .you must certainly not underestimate the
networks between these companies when it [interna-
tional transfer pricing] is such a specialised discipline
– they [networks] are extremely important’ (Transfer
pricing manager, December 2009)
Hence, over time the inter-organisational network
meetings also led to the emergence of more informal net-
work ties across MNEs which helped boost bi-directional
learning and experience on specific international trans-
fer pricing matters. The pre-scheduled network meetings
ensured an on-going, stable access to timely tax infor-
mation, whereas the informal face-to-face relationships
facilitated instant inter-organisational interaction when
this was required by specific current transfer pricing-
related challenges.
The valuable interaction and subsequent learning that
took place through participation in the transfer pricing
network group led to the corporate tax manager eventu-
ally having all members of Global’s tax department enrol
in an inter-organisational network group in their individ-
ual work fields. For example, the company’s VAT specialist
enrolled in an external network group with VAT managers
from other MNEs, where information was shared on gen-
eral VAT issues as well as on VAT issues linked directly
to international transfer pricing. The tax department staff
working with international taxation and transfer pricing
at a more administrative level also enrolled in such exter-
nal network groups with staff from other MNEs in similar
positions working with similar tasks. The corporate tax
manager commented on this initiative:
‘. . .Today, we have all members of [Global] enrolled in
an [inter-organisational] network group because I think
it gives so many benefits. . .getting outside of the com-
pany and interact and get some input is a good thing’.
(Corporate tax manager, December 2009)
Notably, while meetings in the transfer pricing network
group provided valuable learning about how to respond
most effectively to the tax environment, they could also
provide the transfer pricing manager with ideas and
187
insights into different tax and accounting practices in
international transfer pricing which did not match Global’s
fairly conservative approach, i.e. ideas for more aggressive
tax management behaviour. However, the formalised tax
strategy document apparently helped make it clear to
the transfer pricing manager and tax department staff
what were considered appropriate ideas and initiatives
with respect to the new tax strategy. The corporate tax
manager commented on how the intensive focus on tax
compliance, both in the written tax document and through
daily interaction at the intra-group level, apparently
improved the transfer pricing manager’s and tax staff’s
understanding of what opportunities and ideas were
considered in agreement with Global’s new tax strategy
and what should not be further explored:
‘I expect that they [the transfer pricing manager and
tax department staff] are proactive and seek informa-
tion and assess what they believe is relevant to [Global]
and subsequently pass it on to me. . .what I try to do is to
give them some guidelines and outline our [tax] strategy
and policies, and define what initiatives we can poten-
tially bring in under that umbrella. . .However, they
know that there are certain things (ideas and oppor-
tunities) that they should not spend energy on because
they do not match our risk profile. They do not come
to tell me that now they have an idea for a structure
that involves a foreign Macau18 company, because they
know that that is not part of our risk profile and what
we work with in this company. . .but overall I expect
them to bring forward their ideas, they are the ones
who know something about this and know the oppor-
tunities and pitfalls’ (Corporate tax manager, December
2009)
Hence, by conveying and controlling the compliance-
oriented tax agenda through the different MCSs described,
the corporate tax manager was sending a strong signal
to the transfer pricing manager and tax department staff
about what types of opportunities and risks he wanted
them to focus on. To sum up, the corporate tax manager’s
focus on compliance-oriented issues explicated through
the use of both formal documents and face-to-face meet-
ings served as a valuable guideline for his tax department
staff to understand what information they should convey
(bottom-up) and be able to explain and discuss with him.19
Before the discussion of case findings, Table 1 pro-
vides an overview of how the tax strategy affected the
MCS.
18
The corporate tax rate in Macau is 12 per cent, and the region is often
used by companies that are considered to apply rather aggressive tax
planning strategies.
19
In addition to these inter-group networks, other types of learn-
ing/research forums on international transfer pricing have emerged over
time. One example is the ‘International Transfer Pricing Journal’, where
leading experts and consultants discuss recent changes and experiences
in the tax environment. Along with this journal, a number of institutions
are presently conducting tax research as well as providing information and
training on MNE cross-border tax issues, e.g. the International Bureau of
Fiscal Documentation (IBFD), the Council for International Tax Education
(CITE), the Bureau of National Affairs (BNA), and the U.K.-based Tax
Research Network.
188 C. Plesner Rossing / Management Accounting Research 24 (2013) 175–194

Table 1
Main events for the MCS due to implementation of a tax strategy for international transfer pricing.

Belief system Boundary system Diagnostic control Interactive control Tax environment
system system

2006 No formal system No formal system No formal system Initial discussions at • Introduction of a new
identified identified identified top management level documentation and
about the tax penalty system for transfer
environmental change pricing in headquarters’
and how current tax jurisdiction.
practices relate to this. Documentation
requirements in the
statutory rules introduced
are based on the OECD
Guidelines.
• Formal establishment of
the EU Joint Transfer
Pricing Forum.
• FASB announces FIN48
regarding external
reporting of uncertain tax
positions.

2007 Instructions to tax Instructions to tax Intensive functional Intra-organisational

department staff department staff and risk analysis of dialogue and meetings
about the and business unit business units in order on how to respond to
company’s core managers on the to determine the current tax
values, i.e. company’s position arm’s-length profit environment as well as
compliance with on international margins in foreign the emerging changes
tax regulation. transfer pricing business units. in regulation and tax
and the actions Intensive supervision authority practices.
accepted at top of actual earnings
management level. (profit margins) is
established. Deviations
from arm’s-length
profit margins are
corrected through
year-end adjustments.

2008 Development of a Development of a Continuous Inter-organisational • Update to the OECD

formal tax strategy formal tax strategy supervision and group meetings with Model Tax Convention.
for the period that outlines in intensive monitoring of transferpricing and tax This includes adjustments
2008–2012, detail the scope of business unit profit specialists from other to Article 25 regarding the
outlining how to accepted behaviour margins, based on MNEs that are facing Mutual Agreement
manage tax and for employees updated function and similar transfer pricing Procedure to resolve
transfer pricing involved in transfer risk analysis. tax risks. These cross-border tax disputes
issues. pricing matters, high-level discussions and double taxation.
primarily tax focus on how to • OECD releases its report
department staff respond to the on the attribution of profits
and business unit ambiguous and rapidly to permanent
managers. changing tax establishment. The report
environment. Also, examines how the OECD
previous experiences Transfer Pricing Guidelines
of network members should apply to the
with tax authorities are relationship between a
presented, in order to permanent establishment
ensure that other and the MNE group to
network members can which it belongs.
learn and be inspired
from such experiences.

2009 Fine-tuning and Intensive network • Release of the 2009

minor additions to group meetings across edition of OECD Guidelines.
the tax strategy. MNEs continue. Also, • The OECD consultation
more informal process on business
one-to-one meetings restructurings is concluded
between the transfer (initiated in 2005). The
pricing manager and results are included in a
selected network new Chapter IX in the 2010
members are organised edition of OECD Guidelines.
on an ad hoc basis to
stimulate bidirectional
learning and
inspiration.
 C. Plesner Rossing / Management Accounting Research 24 (2013) 175–194
6. Discussion and contribution to theory and
practice
Whereas most research into the relationship between
MCSs and strategy focuses on business strategy (Langfield-
Smith, 1997), this study has discussed how MCSs are
affected by a functional tax strategy in order to minimise
tax risk exposure in a multinational setting.
The paper provides a number of theoretical contrib-
utions as well as implications for practice. In a theoretical
sense, it is argued that the implementation of a func-
tional tax strategy has a significant impact on the MCS in
a multinational setting. Findings fit the argument within
contingency-based theory that organisations adapt their
management accounting and control systems to their orga-
nisational and environmental context. From this particular
study, the functional tax strategy developed in response to
the tax environment is found to be a significant explanatory
variable for the MCS. In the context of the LOC framework
and Simons’ MCS concepts of positive and negative forces
generated through specific control systems, the case study
illustrates how all four types of control levers were influ-
enced by the tax strategy as new formal control systems
were employed and used to support the tax compliance
goal. Some of the formal control systems were used in
an inspiring and stimulating way by the corporate tax
manager to reinforce the values upon which the strat-
egy was based, and also to stimulate learning about the
ambiguous tax environment for subsequent fine-tuning of
current transfer pricing practices (belief systems and inter-
active control systems). Other formal control systems were
used in a more prescriptive and constraining way to guide
accepted behaviour at tax department and business unit
level, and to ensure frequent, strict monitoring of busi-
ness unit profit margins considered to be tax compliant
(boundary systems and diagnostic control systems). The
consequences at business unit level of the tax strategy were
formal reduction in commercial flexibility to avoid tax risks
and a much more constraining use of the MCS in general.
However, the case did illustrate the tax department’s will-
ingness to accommodate business unit requests for price
adjustments, given that they could be substantiated from
an arm’s length perspective. Hence, while the tax strat-
egy overall led to a more constraining use of the MCS, the
formal top-down approach seemed to some extent to be
counter-balanced by a quite collaborative attitude in the
tax department in the way these controls were used in
practice in order to accommodate the commercial chal-
lenges that over time emerged at business unit level.
Moreover, this study is considered to extend
contingency-based theory on MCS and international
transfer pricing in an MNE setting. Specifically, it is argued
that in order to explain the impact from the MNE tax
environment on its MCS, it is necessary to decompose the
visible, formal interactive controls used by a corporate tax
manager with tax department staff in order to address
tax strategy uncertainties. With regards to this, it is also
essential to examine in depth the underlying sources of
information that fuel interactive control processes and are
not as such visible to organisational members or through
academic examination of an MNE’s formal MCS. In this case
189
study, organisational learning in the tax department about
tax-related cause-and-effect relationships was driven
to a wide extent by the information accessed through
inter-organisational network collaboration. From here, tax
uncertainty was reduced, and a more effective and well-
informed interactive control process could subsequently
take place in order to validate existing transfer pricing
practices.
Based on this, it is argued that by integrating network
theory at the inter-organisational level with contingency-
based theory of accounting and control, significant
explanatory power can be added to the theoretical pro-
jection of how MNEs seek to fit their control systems
to tax risk and uncertainty. With reference to Section 3,
inter-organisational collaboration initially took the form
of what can be labelled ‘informal networks’, and was sub-
sequently expanded through the emergence of ‘informal
dyads’. Specifically, the network meetings ensured on-
going, stable access to timely tax information, whereas
the informal dyadic collaboration facilitated instant and
more frequent inter-organisational interaction when this
was required by specific current transfer pricing-related
challenges.
So why are these inter-organisational forms of tax
collaboration emerging? Based on the case evidence, it
appears that the tax knowledge base linked to an increas-
ingly ambiguous tax environment is widely dispersed. This
requires MNEs to transform into an organisational struc-
ture that fits the relational, collaborative view projected by
inter-organisational network theory.
In addition to the above, findings also imply a refine-
ment of the LOC framework. Specifically, it is suggested
that the LOC framework could be enriched by being made
more explicit about the way information that is exchanged
through the use of interactive controls, e.g. between a
corporate tax manager and a transfer pricing manager,
becomes available to the MNE in the first place. In rela-
tion to the use of interactive control involving functional
tax strategies, case evidence suggests that the information
flow and learning at subordinate levels (i.e. TP manager/tax
employee level) is highly inter-organisational (see Fig. 2)
before it becomes available to interactive control. Hence,
researchers of MCS should be aware of the importance
of explicitly examining the underlying information and
knowledge flows that precede interactive control pro-
cesses, as this may increase the understanding of how
organisational learning emerges and enriches formal MCS
routines. The latter obviously not only applies to research
studies applying the LOC framework, but is also considered
valid when other MCS frameworks are adopted for research
purposes.
A practical implication arising from this case relates to
the observation that the learning that emerged from inter-
organisational network participation was not formalised
or entered into appropriate systems (e.g. a knowledge
management system) for subsequent use. Knowledge man-
agement should have high priority in a world where
transfer pricing specialists are in great demand (e.g.
Borkowski, 2006), which may lead to high employee
turnover which in turn often results in loss of tax knowl-
edge. MNEs should consider initiatives for capturing and
190 C. Plesner Rossing / Management Accounting Research 24 (2013) 175–194
Strategy as “Perspective”
Obtaining commitment to the purpose of tax
compliance, including tax positions on international
transfer pricing.
Belief
Systems
Core values-
Compliance with tax and
transfer pricing regulations
Tax
Strategy
Strategic uncertainties –
Focuses attention on the
MNE tax environment including
Interactive
change in regulation and tax
Control authority practices
Systems
Intra- Inter-
organisational organisational
interaction interaction
Strategy as “Patterns in Action”
Intra-organisational interaction about the MNE’s tax
environment through face-to-face group meetings between the
corporate tax manager and the transfer pricing manager/tax
department employees. Meetings will center around what has
changed in the tax environment, why it has changed and what
we are going to do about it. The information exchanged at
these meetings is supported by information exchange and
learning from inter-organisational network ties across MNEs.
Fig. 2. Management control systems for implementing a tax strategy for international transfer pricing.
securing tax information and knowledge,20 as it represents
a significant organisational resource for the management
of MNE tax risks. As this expert knowledge represents a
competitive advantage to transfer pricing specialists, MNEs
face the challenge of creating incentives for these experts
to transfer it in a more materialised form in the first place.
Notably, national tax inspectors’ access to data for the pur-
poses of assessing a tax filing or tax position (e.g. transfer
prices) varies in scope across tax jurisdictions and is subject
to certain restrictions. For example, in Great Britain, Her
Majesty’s Revenue & Customs (HMRC) tax inspectors may
20
While a debate of the distinction between the terms ‘information’, and
‘knowledge’ is beyond the scope of this paper, a position on their mean-
ing seems appropriate: For this purpose, the paper adopts the view held
by Alavi and Leidner (2001, p. 109) suggesting that ‘. . .the presumption
of a hierarchy from data to information to knowledge with each varying
along some dimensions, such as context, usefulness, or interpretability,
rarely survives scrupulous evaluation. What is key to effectively distin-
guishing between information and knowledge is not found in the content,
structure, accuracy, or utility of the supposed information or knowledge.
Rather, knowledge is information possessed in the mind of individuals: it
is personalised information (which may or may not be new, unique, useful,
or accurate) related to facts, procedures, concepts, interpretations, ideas,
observations, and judgments’. Hence, knowledge can be seen as a justified
belief that increases an entity’s capacity for effective decision making and
action (Alavi and Leidner, 2001; Huber, 1991).
Strategy as “Position”
Provide tax department and business unit staff with
transfer pricing guidelines/instructions on appropriate
behavior and scope of opportunity seeking in the
pursuit of meeting the tax strategy goal of compliance.
Boundary
Risks to be avoided – Systems
Reputational risks and financial
risks in the form of double
taxation and fines
Critical
performance variables –
Arm’s–length
profit margins in Diagnostic
business units Control
Systems
Strategy as “Plan”
Financial information to measure if business unit
profit targets are met. Profit targets are based on
function and risk analysis of business units.
Based on this, benchmark studies of similar
independent companies are carried out in order to
approximate arm’s-length profit margins.
require access to documents that are in the ‘possession or
power’ of the tax payer.21 A tax knowledge management
system would generally be within the scope of physical
and electronic material that tax inspectors can legitimately
require access to for the purposes of assessing MNE tax
practices. However, for compliance-oriented MNEs, such
systems might be to the MNE’s advantage in its attempt to
explain previous tax decisions.
The study also has implications for companies consid-
ering the APA as a potential way out of significant tax risk
exposures. While the APA programme may seem as the per-
fect risk management tool for eliminating tax uncertainty,
this was by far the case for this MNE:
‘If your business model changes, an APA is a really bad
solution. . .when you are in the process of establishing
an APA and want to cover five years, it takes two years to
21
See HMRC operational guidance for tax inspectors: ‘Information and
Inspection Powers: Conditions and Safeguards: Restrictions’, available
at http://www.hmrc.gov.uk/manuals/chmanual/ch22100.htm. This guid-
ance also includes insights into restrictions on the types of documents and
information that can be required by a tax inspector.
For a full overview of the HMRC’s new inspection, information and record-
keeping powers and obligations introduced for corporation tax 1 April
2009, see http://www.hmrc.gov.uk/compliance/faqs.htm.
 C. Plesner Rossing / Management Accounting Research 24 (2013) 175–194
negotiate it and then you have a five-year period from
there. This means that from the time you consider an
APA until it expires, 7 years pass, and in that period your
business model needs to be the same. . .So they [APAs]
are not for everyone and not for any transaction. . .’
(Transfer pricing manager, April 2012)
In fact, the APA process in some countries is much
longer than two years, in particular for bi-lateral APAs.
For example, in 2010 the APA average processing time
was 42.5 months in the U.S., and in Canada it was 49
months (Borkowski, 2012), while HMRC were relatively
faster, reporting an average time to agreement of 22.7
months, with 50% agreed within 14 months.22 Hence, MNEs
should carefully examine if their value chain is sufficiently
static in order for the APA programme to be a realistic alter-
native to other forms of tax risk management. Also, policy
makers should on an on-going basis consider if both the
uni- and the bi-lateral APA processing time are satisfactory,
or whether they could be more efficient. The significant
variance in average processing time indicates that there is
room for improvement in certain jurisdictions.
7. Conclusion
This paper has addressed how a functional tax strategy
influences the MCS in an MNE facing transfer pricing tax
risks.
Applying ‘Levers of Control’ (Simons, 1995) as a guid-
ing framework, it is found that a functional tax strategy for
transfer pricing influences on all four control levers, which
suggests that the MCS in a multinational setting is con-
tingent upon the MNE’s response to its tax environment.
Specifically, belief systems and interactive control systems
are employed and then used in an inspiring way to rein-
force the values upon which the tax strategy is based, and
to stimulate learning about the tax environment for sub-
sequent fine-tuning of the MNE’s current transfer pricing
practices. Furthermore, boundary systems and diagnostic
control systems are employed and then used prescriptively
to constrain and guide accepted behaviour, both in the cen-
tral tax department and at business unit level, as well as to
ensure monitoring of business unit profit margins consid-
ered to be arm’s-length.
An additional significant observation, adding to the
existing contingency-based MCS theory, is that inter-
organisational network ties play a key role for the
interactive control process that takes place in an MNE in
relation to its tax strategy. Specifically, as transfer pricing
knowledge is found to be widely dispersed among MNE
transfer pricing specialists, these individuals establish var-
ious forms of inter-organisational network ties to access
complex information for the purpose of reducing tax uncer-
tainty. The knowledge generated from various forms of
network collaboration across MNEs is subsequently used
to enhance the quality of discussions during interactive
control.
22
Note that HMRC in their statistics do not distinguish between uni-
and bi-lateral APAs. For further HMRC transfer pricing statistics, see:
http://www.hmrc.gov.uk/international/transfer-pricing-stats.pdf.
191
Hence, in order to ensure a more complete understand-
ing of MCS in a multinational setting, it is necessary to take
into consideration the role inter-organisational networks
play for an interactive control system.
This study has some limitations. Specifically, as a single-
case study research strategy was used, it is not possible
to conclude that the findings may be generalised to apply
to other MNEs. However, the fact that the transfer pricing
networks exist is a strong indication that similar patterns
of inter-organisational collaboration on tax matters can be
found in other MNEs pursuing a tax compliance strategy.
Conversely, it is possible that the influence on managerial
controls in MNEs that apply more aggressive tax avoid-
ance strategies would deviate from those observed in
this particular study. In fact, it is questionable whether
such MNEs would even be willing to participate in inter-
organisational networks, as this would most likely require
them to expose their tax avoidance schemes. Finally, the
current study does not allow any conclusions with regards
to what might induce a transfer pricing specialist to leave
an inter-organisational network at a certain point in time.
Currently, many fertile avenues are open for future
research on tax risk. In relation to APAs, more field work is
needed to achieve better understanding of the relationship
between tax authorities and MNEs, including why not more
APAs exist. Also, the potential impact of tax compliance
on intra-group finance activities and structures would con-
tribute to the current body of literature. Moreover, tax risks
in due diligence processes are absent from current theory,
although they may very well play a significant role for the
valuation of target companies. In addition, with respect to
financial reporting of transfer pricing tax risks under FIN48,
little is known about the process of identifying and quanti-
fying tax risks for external reporting purposes. Finally, the
potential impact of VAT regulation on MNEs’ transfer pri-
cing systems is not well-understood and remains an area
for future research.
Acknowledgements
I am grateful for the helpful and constructive feedback
provided by Carsten Rohde, Martine Cools, Antonio Dávila,
Trond Bjørnenak, Stan Brignall, Walther Powell, Jytte
Larsen, Susanne Askham, Carly Kline, Nicolai Soegaard,
participants in the 6th EIASM Conference on Performance
Measurement and Management Control (Nice, 2011), and
tax consultants employed at a big-four accounting firm. I
am also grateful for the valuable and constructive feedback
provided by two anonymous reviewers on a previous ver-
sion of the paper. Moreover, I wish to express my thanks
to employees at the MNE under study for their openness
and willingness to participate in the study. Finally, I want
to thank the Danish Institute of State-Authorized Public
Accountants for their financial support.
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