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?
the strategy, as per the argument:
more capital needs to go to subsidiaries where the taxes are low
less capital needs to be directed to subsidiaries where the taxes are high.
thus, where the taxes are higher, a subsidiary needs to pay more, so profit margin is decreased.
where the taxes are low, subsidiary needs to pay less. so profit margin is increased.
(A) Sell its subsidiary located in a high tax rate country products at low prices
if low, then by selling the product, the subsidiary increases it's profit margin..and more tax is paid.
(B) Charge its subsidiary located in a low tax rate country higher prices for products sold
if subsidiary where the taxes are low pays more, then the profit margin is decreased..but we need the opposite.
(C) Pay its subsidiary located in a high tax rate country high prices for products bought
no. if we pay more, then the profit margin in increased, and more needs to be paid on taxes.
(D) Pay its subsidiary located in a low tax rate country low prices for products bought
we need to pay more to subsidiaries in low tax rate countries, so that to pay less on taxes. so no.
(E) Pay its subsidiary located in a low tax rate country high prices for products bought
yes...we give MORE money to subsidiaries where the tax is low.
profit margin is increased..
E is the best.