A New Approach to Transfer Pricing for Multinationals

This paper aims at approaching the valuation of transactions between related parties of multinational companies with an updated arm's length approach. Based on transaction cost economics (TCE) and its related theory of the multinational firm, the paper takes the widespread criticism and shortcomings of the arm's length standard and asks for modifying allocation mechanisms. The paper proposes a three-step tax-world income allocation model which is more coherent with the business world of multinational companies. It is then suggested that such tax-world transfer pricing will release income allocation results in a more adequate fashion to global business processes.