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# Large corporations use several strategies to minimize their

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Large corporations use several strategies to minimize their [#permalink]

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02 Apr 2013, 14:14
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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
[Reveal] Spoiler: OA

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Re: Large corporations use several strategies to minimize their [#permalink]

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02 Apr 2013, 18:19
I was between B and E, and I picked E. This one is tough because I am having trouble with the wording. Who does the selling/charging/paying in the answers?

(E) Pay its subsidiary located in a low tax rate country high prices for products bought
The low tax subsidiary buys products from the high tax subsidiary at high prices. This reduces profit from the high tax subsidary and increase profits from low tax subsidiary.
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Re: Large corporations use several strategies to minimize their [#permalink]

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03 Apr 2013, 01:27
DoItRight wrote:
I was between B and E, and I picked E. This one is tough because I am having trouble with the wording. Who does the selling/charging/paying in the answers?

(E) Pay its subsidiary located in a low tax rate country high prices for products bought
The low tax subsidiary buys products from the high tax subsidiary at high prices. This reduces profit from the high tax subsidary and increase profits from low tax subsidiary.

Well I think in B charge means selling products and in E paying means buying products. The stimulus states that the company use transfer pricing by selling their products to low tax countries and not the other way round (like in E).
So it should be B.

Let me know if this makes sense.
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Re: Large corporations use several strategies to minimize their [#permalink]

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03 Apr 2013, 01:37
my take will be C : Pay its subsidiary located in a high tax rate country high prices for products bought

plz share the OA
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Re: Large corporations use several strategies to minimize their [#permalink]

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03 Apr 2013, 02:41
Premise:
Transfert pricing ( when subsidiaries in different countries charge each other for goods or services "sold" within the group) leads to minimize large corporations's tax payements without doing anything explicitly illegal.
For e.g : technology and drug companies
Conclusion:
These large corporations extends the use of "transfert pricing", benefiting from these intra-transactions that are supposed to be arm's lenght , to minimise profits in high tax countiries 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?

Logically, I'd say that if u wanna maximise profits in low-tax countries, you need to sold products at higher prices OR if u wanna minimise profits in high tax countries then you need to buy products at higher prices thereby lowering the benefits .

Only B fits
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Re: Large corporations use several strategies to minimize their [#permalink]

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03 Apr 2013, 02:50
Quote:
OR if u wanna minimise profits in high tax countries then you need to buy products at higher prices thereby lowering the benefits .

this is exactly what C is doing !!
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Re: Large corporations use several strategies to minimize their [#permalink]

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03 Apr 2013, 03:16
Quote:
OR if u wanna minimise profits in high tax countries then you need to buy products at higher prices thereby lowering the benefits .

this is exactly what C is doing !!

(C) Pay its subsidiary located in a high tax rate country high prices for products bought

Indeed aditya, but what is the most profitable for the company : maximising profit in low-tax-rate countries or minimising profit in high-tax-rate ?

You need to stay within the option's scope. So again, i'll go for B.

Waiting for the OA and the OE .

BTW: +1 Carcass good one as usual
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Re: Large corporations use several strategies to minimize their [#permalink]

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03 Apr 2013, 03:41
Quote:
but what is the most profitable for the company : maximising profit in low-tax-rate countries or minimising profit in high-tax-rate ?

the question talks of both the possibility :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.

now to give preference to one over another is not right .
i am not sure if it a good question but i feel this is definitely not a prep question !!!
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Re: Large corporations use several strategies to minimize their [#permalink]

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03 Apr 2013, 03:42
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Hello,

I'm not a Tax expert but I tried to summurize the strategy described on the stem and the answer choices.

Please guys, tell me if I'm wrong
Attachments

Price strategy.JPG [ 18.03 KiB | Viewed 3632 times ]

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Re: Large corporations use several strategies to minimize their [#permalink]

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03 Apr 2013, 03:51
Tagger wrote:
Hello,

I'm not a Tax expert but I tried to summurize the strategy described on the stem and the answer choices.

Please guys, tell me if I'm wrong

tagger what is KO that u have used for option D
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Re: Large corporations use several strategies to minimize their [#permalink]

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03 Apr 2013, 03:56
Tagger wrote:
Hello,

I'm not a Tax expert but I tried to summurize the strategy described on the stem and the answer choices.

Please guys, tell me if I'm wrong

tagger what is KO that u have used for option D

It is the opposit of "E" so it is not coherent with the strategy
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Re: Large corporations use several strategies to minimize their [#permalink]

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03 Apr 2013, 04:05
Tagger wrote:
Tagger wrote:
Hello,

I'm not a Tax expert but I tried to summurize the strategy described on the stem and the answer choices.

Please guys, tell me if I'm wrong

tagger what is KO that u have used for option D

It is the opposit of "E" so it is not coherent with the strategy

well profit = revenue -cost
so in a low taxed economy the passage is asking to maximize profits .E will not achieve that purpose coz if ur paying more in such a economy then effectively ur cost is increasing .in fact D is very much coherent with the passage !!.

i had boiled down to C and D but picked C
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Re: Large corporations use several strategies to minimize their [#permalink]

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03 Apr 2013, 06:19
I'm still convinced of my reasoning.

Even if they're paying more, all the subsidiary's benefits (who will pay less taxes according to the pricing strategy) will belong to the Mother Company.

It's a very tough one, OA is strongly needed !
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Re: Large corporations use several strategies to minimize their [#permalink]

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03 Apr 2013, 07:54
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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
Selling the subsidiary weakens the argument because then transfer pricing cannot take place . Wrong

(B) Charge its subsidiary located in a low tax rate country higher prices for products sold
If the Corporation charges higher prices for the products sold to its subsidiary then the corporation will have to pay more tax . Wrong

(C) Pay its subsidiary located in a high tax rate country high prices for products bought
If the Corporation pays its subsidiary high prices in a high tax rate then it is paying more taxes in a high priced country . Wrong

(D) Pay its subsidiary located in a low tax rate country low prices for products bought
If the corporation pays low prices to its subsidiary in a low price country then it is not maximizing its profits .Wrong

(E) Pay its subsidiary located in a low tax rate country high prices for products bought
Correct . If a corporation pays high prices in a low tax country then its profits are maximized as the transactions can be showed as expenses
in which the corporation is located and hence save tax and the subsidiary will pay low taxes as the tax rate is low in the country in which the subsidiary is located .
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Re: Large corporations use several strategies to minimize their [#permalink]

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03 Apr 2013, 08:52
(A) Sell its subsidiary located in a high tax rate country products at low prices
---------- If the Cost Price (CP) of the subsidiary company will be low and the selling price (SP) will be constant, then profit will increase and more tax will be levied in high tax rate country. Incorrect.
(B) Charge its subsidiary located in a low tax rate country higher prices for products sold
-------------- If the CP of the subsidiary company will be high and the SP will be constant, then profit will decrease and tax liability will be less but less tax liability is not good for the parent company as the country is low tax rate country.
(C) Pay its subsidiary located in a high tax rate country high prices for products bought
----------------- If the SP of the subsidiary company will be more and CP will be constant, profit will increase and hence tax liability will be more but as the country is high tax rate country so it is not beneficial for the parent company.
(D) Pay its subsidiary located in a low tax rate country low prices for products bought
----------- If the SP of the subsidiary country will be less and CP will be constant, Profit will be less and hence tax liability will be less but as the country is low tax rate country so it is not beneficial for the parent company.
(E) Pay its subsidiary located in a low tax rate country high prices for products bought
--------------- If the SP of the subsidiary country will be more and CP will be constant, Profit will be more and hence tax liability will be more but as the country is low tax rate country so it is beneficial for the parent company as the actual tax payout is ultimately low.
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Re: Large corporations use several strategies to minimize their [#permalink]

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03 Apr 2013, 12:08
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Ok guys here we are to takle this really and wordy tough question.

Before diving into the question I would like to share what for for me is the major $$takeaway$$ from this such question (and actually from all questions):

- whenever you see a question like this first of all is important to understand what's going on, even reading the stimulus two times. On average you should be able to solve a question in two minutes but this is "on average" so do not be afraid to spend even 2.50 or 3.00 minutes. For sure such question pop-up in front of the screen if you do well on the test, no matter what.

- when a question is blury and confused and wordy try to spot an anchor word or sentence or part of the stimulus that leads you on the right track.

Now back to the quesyion at stake:

the stem says

Quote:
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 last part of the stimulus says

Quote:
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.

So this lead us to B D and E

(B) Charge its subsidiary located in a low tax rate country higher prices for products sold

Here the key word is charge. This means that the company $$receives$$ money but from the argument we need an answer where the comany $$pays$$ the associate company of the holding

D) Pay its subsidiary located in a low tax rate country low prices for products bought

If this were true the tax rate would be low but due to the low prices paied by the company the $$OVERALL$$ gain of the holding would be low, no matter what

(E) Pay its subsidiary located in a low tax rate country high prices for products bought

This is what we are looking for..........the tax rate is low the company pay an high price to the subsidiary AND at the same time the expenditure in taxes is low. In other words: if the company pays 100 and the taxes are 10 the gain is 90. Therefore, the OVERALL situation gains from this scenario (i.e. the holding)

E is the OA.

Thanks guys for discussion.
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Re: Large corporations use several strategies to minimize their [#permalink]

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03 Apr 2013, 19:34
this question is especially easy if you studied international business

not sure if we'll be able to see this kind of question in gmat?
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Re: Large corporations use several strategies to minimize their [#permalink]

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03 Apr 2013, 20:20
waris1987 wrote:
this question is especially easy if you studied international business

not sure if we'll be able to see this kind of question in gmat?

is the source of this question from some authentic sources such as Manhattan ,Veritas or gmat prep ?
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Re: R: Large corporations use several strategies to minimize the [#permalink]

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04 Apr 2013, 01:22
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First of all do not assume that if you can bring info from outer context is the solution. If I am a doctor would be fine with an RC passage that talks about a new cure.... but for a passage about astronomy? what could I do?

The moral is this: handle a question as you don't know nothing about, using the logic.

After all the gmat says that you don't need a specific knowledge about the argument at stake.

Secondly, this is a really good GMAT-like question and I don't understand why it can't appear on the test considering that talks of something related to biz and this is a test for BS.......

instead to care about if the question is simple or not or if it would appear or not, trying to learn the most from the question, squeezing good insights.

Regards

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Re: Large corporations use several strategies to minimize their [#permalink]

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08 Apr 2013, 22:25
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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

Tough one not because of the logic, but because of the confusion between high and low, low and high.

The logic of transfer pricing is that you transfer tax from high tax countries to low tax countries. So in high tax countries, you pay less than you have to. For more details, the strategy is:
- High tax countries: Low revenue, High cost.
- Low tax countries: High revenue, Low cost.

E is correct: because you recognize high revenue in low tax countries, it means you recognize low revenue in high tax countries. That's why the strategy names "transfer pricing".

Hope it's clear.
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Re: Large corporations use several strategies to minimize their   [#permalink] 08 Apr 2013, 22:25

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