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Large corporations use several strategies to minimize their

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Manager
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Joined: 09 Apr 2013
Posts: 147
Location: India
WE: Supply Chain Management (Consulting)
Followers: 1

Kudos [?]: 69 [0], given: 18

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Re: Large corporations use several strategies to minimize their [#permalink] New post 29 Nov 2013, 10:53
Really tough one. I am left with some confusion even after reading the choices several times.

Anyways good explanation by carcass. :)
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Manager
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Re: Large corporations use several strategies to minimize their [#permalink] New post 12 May 2015, 06:40
carcass wrote:
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.
Manager
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Re: Large corporations use several strategies to minimize their [#permalink] New post 14 Sep 2015, 08:56
My take is Option E. Looks very simple to me. Approach explained below:
The gist of the question stem is "Companies use transfer pricing to minimize their tax payments". How??? Only if the companies can get higher prices for products in low tax countries so that they can pay low income tax and earn max. profits :)

Now let's evaluate Options

(A) Sell its subsidiary located in a high tax rate country products at low prices - "Low price in high tax rate country, okay but still the company is at loss as they are getting lower prices (though they are paying low tax)"

(B) Charge its subsidiary located in a low tax rate country higher prices for products sold - "It's a catch. Charging subsidiary in low tax rate country higher prices for products sold. In the cash flows are not going to the low tax country but but infact its outside the low tax country"

(C) Pay its subsidiary located in a high tax rate country high prices for products bought - "High prices in high tax country will attract high income tax."

(D) Pay its subsidiary located in a low tax rate country low prices for products bought - "Low prices in low tax country. Okay, this leads to lower tax but again not a good way to maximize profit"

(E) Pay its subsidiary located in a low tax rate country high prices for products bought - "Bingo..High prices in low tax country. Low income tax and high profit :) Hence the correct answer"

Thanks,
Chanakya


Hit kudos if you like the explanation!
Re: Large corporations use several strategies to minimize their   [#permalink] 14 Sep 2015, 08:56

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