Reviews the book `Transfer Pricing in the 1990s: Tax and Management Perspectives,' by Roger Y.W. Tang.

In this article, the author responds to comments by the accounting expert Harry Zvi Davis, on his article "The Effects of LIFO Inventory Costing on Resource Allocation," that was previously published in the journal "The Accounting Review." The author says Davis suggests that his paper's conclusion is that a firm that uses LIFO will necessarily expend more resources to maintain year-end inventory levels than will a firm that does not use LIFO. Based on the mathematical development of the argument contained in the appendix to my article, this is, in fact, the conclusion. However, notwithstanding Davis' correction, the conclusion as set forth in the paper may still be correct when viewed from other perspectives. In order for Davis' conclusion to be correct, LIFO firm's ending inventory for each year must be identical with that of the non-LIFO firm, not merely non-decreasing. The probability that LIFO has no effect on resource allocation becomes even smaller when one takes into account all LIFO pools that exist in any given year.

The use of the LIFO inventory method is advantageous to taxpayers in periods of rising inventory prices since it can reduce the amount of taxes which must be paid on inventory profits. This tax reduction can be accomplished most successfully if the taxpayer does not permit the level of ending inventories for a year to be any less than that level was at the beginning of the year. In this paper, the year-end inventory maintenance activity by firms who use LIFO is analyzed in the context of economic efficiency. The methodology employed is the construction of an analytical model for after-tax economic profit maximization by a firm which uses LIFO, an analysis of the profit maximizing conditions from a Pareto-optimal perspective, and the conclusion that year-end inventory maintenance is an inefficient use of resources. The paper concludes by suggesting a replacement cost solution to the problem of accounting for inventories as a more efficient alternative to LIFO.

The article comments on the paper "Misleading Tax Figures--A Problem for Accountants," by Richard P. Weber. The paper is based on the topic of the allowable methods of allocating a consolidated return tax liability among the various members of an affiliated group pursuant to Section 1552 of the U.S. Internal Revenue Code and Reg. &3x00A7;1.1502-33(d)(2). It presents a numerical example which illustrates the nine possible allocations of the consolidated tax liability considering these statutory provisions. The author disagrees with the paper's conclusion that when members of an affiliated group publish separate financial statements and use a different method of allocating the consolidated tax liability for financial reporting purposes than for tax purposes, the resulting tax liability as reported on the financial statements may be misleading. Apparently, the basis of Weber's conclusion is that the allocated tax liability is different from what the tax would have been if the individual company had not been a member of an affiliated group.

[Multinational Enterprises (MNEs) have an incentive to shift income to lower taxed jurisdictions. On July 1, 1994, the Treasury Department issued intercompany transfer pricing regulations to mitigate such transfer of income resulting from the use of intangibles. The regulations give three alternative methods-(1) Comparable Uncontrolled Transactions (CUT), (2) Comparable Profit Method (CPM) and (3) Profit Split-to tax the intangibles. However, each of these three methods introduces incentives to the MNEs to alter resource allocations in comparison with a full-information optimum. In this paper, we examine the resource allocation changes under each method. The policy alternative to the use of such approximating measures is an increased attempt at direct valuation.]

[This paper analyzes the payment of monetary compensation (salary) and nontaxable benefits and develops an expansion path for the optimal combination of salary and benefits. The results explain why 1) the employer has an incentive to pay nontaxable benefits instead of salary, 2) benefits such as health insurance are given to lowly as well as highly paid employees while perquisites become a more favored form of compensation as employees' incomes increase, 3) an employee at or near the minimum wage for his or her occupation may receive increases in compensation in the form of increased nontaxable benefits, 4) a broad class of middle management employees are all paid the maximum legal benefits for their job classification, and 5) the employer may authorize the payment of possibly nondeductible benefits to highly compensated executives.]

[This study examines how transfer pricing, in the presence of differential taxation, affects the resource allocation and profitability of a decentralized multinational enterprise (MNE) that uses the same transfer price for tax and performance evaluation purposes. An analytical model is built in which a foreign manufacturing division transfers a single product to a U.S. distribution division, which, in turn, sells it in the marketplace as part of a final product. It is assumed that both divisions have complete information concerning all cost and revenue functions and that tax rates are higher in the United States than abroad. Given this assumption, it is shown that it is in the interest of both divisions to cooperate with each other, and a cooperative equilibrium is used throughout the analysis. When differential tax rates exist, but there are no transfer-pricing rules imposed by the taxing authorities, it is shown that the MNE's optimal resource allocation is the same as in the absence of taxes; however, firmwide profits are not maximized. When the resale-price method of computing transfer prices (Reg. Section 1.482-2(e)(3)) is used, the results differ, depending on the manufacturing division's bargaining power. At low levels of bargaining power, the distribution division will "guarantee" a certain level of profit to the manufacturing division, and firmwide after-tax profits will be maximized. As the manufacturing division's bargaining power increases beyond a certain point, however, firmwide optimal profits will no longer be achieved. In addition, the final product and the most similar product (as defined by Reg. Section 1.482-2(e)(3)) will be produced beyond the firmwide after-tax optimum. When transfer prices are computed in accordance with the cost-plus method (Reg. Section 1.482-2(e)(4)), it is shown that production of the final product first decreases, then increases, and production of the most similar product increases as the distribution division's bargaining strength increases. In addition, there is no guarantee of profit to the manufacturing division. Accordingly, it is unlikely that firmwide after-tax profits will be maximized. Demonstration of these results is achieved with the use of numerical examples. The study concludes with a discussion of the tax policy implications of these results.]

Reviews the book "Contemporary Tax Research," edited by Shane Moriarity and Julie H. Collins.

Replies to the comments of A. Seetharaman and T.D. Englebrech on the 1987 article `The Effect of the Thor Power Tool Decision on the LIFO/FIFO Choice,' in the October 1990 issue of `The Accounting Review.' Potential problem with Standard Industry Classification code 3714; Sample selection criteria used; Appropriateness of Fisher's Exact Test in the analysis.