Transfer prices are the prices charged by one party for goods and/or services transferred to a related party. While transfer prices are essential to the goal of profit maximization within the enterprise, difficulties arise over how to establish the "correct" transfer price. For the global enterprise this problem is more acute because different segments of the enterprise operate under different political jurisdictions and are subject to taxation by different political entities. Concerns have been raised by Congress and the Internal Revenue Service regarding whether multinationals, especially foreign-owned multinationals, are using transfer-pricing and cost-allocation policies across international borders to avoid United States income taxes. Generally, testimony before the hearings, limited anecdotal studies, and court case findings have suggested that multinationals do not pay their "fair share".

An examination of 336 companies in the chemical industry (STC codes 2800-2899) provided mixed support for the position that multinationals are paying less than their "fair share" of U.S. income taxes. While statistically significant differences were found among the three groups for the cost-ofgood-sold (COGS) ratio (after developmental stage enterprises were removed) and for the worldwide net-profit ratio, no Statistically significant differences were found for tax-rate measures (worldwide effective income tax rate, worldwide effective operating income tax rate, and U.S. effective operating income tax rate) or for the return measures (worldwide return on assets, worldwide operating return on assets, and U.S. operating return on assets). When multinationals (U.S.-controlled and foreign-controlled combined to form a single group) were compared to domestic companies, statistically significant differences were found only for the COGS ratio. When U.S. multinationals were restricted to those companies with 50% or more of both their net sales and average total assets abroad, statistically Significant differences were found for the operating income ratios (both U.S. and worldwide) and for the worldwide net profit ratio, but such differences were found neither for the COGS ratio, the effective-income-tax-rate measures, nor for the return measures.

Complicating the issue were: (1) the presence of developing stage enterprises and foreign parent companies among the total group; (2) the use of a 10% cutoff in ownership and operations to determine whether a company is or is not a multinational; and (3) the absence of access to tax or accounting records, resulting in the need to use secondary sources for data.

One suggestion for simplifying the transfer-pricing issue is the adoption of a method of formulary apportionment. Ina comparison of the amount of income allocated to U.S. operations under current methods (either specific allocation Or separate accounting) and the amount that would have been allocated under formulary apportionment methods no significant differences were found, suggesting that such a method is worthy of further study.