This chapter discussed transferring profits between divisions of a multinational company. Another situation where transfer prices have a similar effect is when a parent company transfers items to or from a subsidiary when there are minority shareholders in the subsidiary. Consider the Michelin Group and its Polish subsidiary, Stomil Olsztyn , of which Michelin owns 70%. Michelin buys tires from Stomil Olsztyn at a transfer price. Since Michelin owns a majority of Stomil Olsztyn, it controls the transfer-pricing policy. The holders of the other 30% of Stomil Olsztyn claim that Michelin sets the transfer prices too low, thereby reducing the profits of Stomil Olsztyn. They maintain that Stomil Olsztyn would be more profitable if it were allowed to sell its tires on the market rather than transfer them to Michelin. In reply, Michelin managers maintain that Stomil Olsztyn is more profitable than other members of the Michelin Group, and, therefore, the transfer prices must be fair.

Discuss the incentives for Michelin to transfer tires at a low price from Stomil Olsztyn to its Michelin parent. What transfer price do the minority shareholders in Stomil Olsztyn favor? Use an example of a tire that Stomil Olsztyn produces at a variable cost of €20 that is transferred to Michelin for €25. How should Michelin and Stomil Olsztyn establish a fair transfer price?