The increased sophistication and integration of operations within multinational enterprises (MNEs) call for more nuanced transfer pricing techniques for profit allocation. This trend raises the issue of the transfer pricing methodologies and techniques that shall be used by MNEs to define optimal and defendable transfer pricing policy within their organization. In situations where external references are lacking and/or where businesses are integrated and unique and valuable intangibles are jointly developed, the need for alternative quantification methods is crucial to answer the central question of what is arm's length.

This article from Tax Planning International Transfer Pricing—by Dr. Alexander Voegele, Sébastien Gonnet, and Bastian Gottschling—is the first in a series of three articles on the role that game theory can play in transfer pricing. This article describes the basics of game theory and demonstrates how it can be applied to transfer pricing in theory and in practice. The second article will focus on the application of game theory to the transfer pricing of intellectual property, and the third article will deal with the application of game theory for the purpose of transfer pricing in the banking and insurance industry.