Large corporations use several strategies to minimize their tax payments, without doing anything
explicitly illegal. One such strategy involves the use of transfer pricing, when subsidiaries in
different countries charge each other for goods or services “sold” within the group. This is
particularly popular among technology and drug companies that have lots of intellectual
property, the value of which is especially subjective. These intra-company royalty transactions
are supposed to be arm’s-length, but are often priced to minimise profits in high-tax countries
and maximise them in low-tax ones.
If the above statements are true, then which of the following could be a strategy adopted by a
company that wants to get the maximum benefit out of transfer pricing?
(A) Sell its subsidiary located in a high tax rate country products at low prices
(B) Charge its subsidiary located in a low tax rate country higher prices for products sold
(C) Pay its subsidiary located in a high tax rate country high prices for products bought
(D) Pay its subsidiary located in a low tax rate country low prices for products bought
(E) Pay its subsidiary located in a low tax rate country high prices for products bought
Between D and E.
in E if prices are higher then subsidiary will be more and thus more profit.Thus,Low rate country with high prices.