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Forcing Multinationals to Play Fair: Proposals for a Rigorous Transfer Pricing Theory

This Article incorporates the principles of modern corporate finance and valuation theory into the transfer pricing rules. In particular, I argue that the problem of allocating income among members of a multinational group should be based on the same principles that underlie portfolio allocation. This leap only requires one to assume that multinational enterprises attempt to maximize profit of the group as a whole, rather than maximizing the profit of each individual member of the group Because the problem of portfolio allocation has been extensively studied, incorporating this body of literature into the analysis of transfer pricing would significantly increase both the sophistication of the analysis and well as the accuracy of the resulting allocations.