GMAT Question of the Day - Daily to your Mailbox; hard ones only

 It is currently 14 Oct 2019, 13:52

### GMAT Club Daily Prep

#### Thank you for using the timer - this advanced tool can estimate your performance and suggest more practice questions. We have subscribed you to Daily Prep Questions via email.

Customized
for You

we will pick new questions that match your level based on your Timer History

Track

every week, we’ll send you an estimated GMAT score based on your performance

Practice
Pays

we will pick new questions that match your level based on your Timer History

# Large corporations use several strategies to minimize their

Author Message
TAGS:

### Hide Tags

Manager
Joined: 09 Apr 2013
Posts: 97
Location: India
WE: Supply Chain Management (Consulting)
Re: Large corporations use several strategies to minimize their  [#permalink]

### Show Tags

29 Nov 2013, 11:53
Really tough one. I am left with some confusion even after reading the choices several times.

Anyways good explanation by carcass.
_________________
+1 KUDOS is the best way to say thanks

"Pay attention to every detail"
Manager
Joined: 22 Aug 2014
Posts: 136
Re: Large corporations use several strategies to minimize their  [#permalink]

### Show Tags

12 May 2015, 07:40
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
Joined: 08 Sep 2010
Posts: 56
Re: Large corporations use several strategies to minimize their  [#permalink]

### Show Tags

14 Sep 2015, 09:56
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!
Board of Directors
Joined: 17 Jul 2014
Posts: 2515
Location: United States (IL)
Concentration: Finance, Economics
GMAT 1: 650 Q49 V30
GPA: 3.92
WE: General Management (Transportation)
Re: Large corporations use several strategies to minimize their  [#permalink]

### Show Tags

26 Mar 2016, 19:37
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?

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.
VP
Joined: 12 Dec 2016
Posts: 1493
Location: United States
GMAT 1: 700 Q49 V33
GPA: 3.64
Re: Large corporations use several strategies to minimize their  [#permalink]

### Show Tags

23 Jun 2017, 04:23
first, the question is application question. => I am fine with this.
Next, there are 4 important facts with confusing concepts from the passage => i am okay with this.
Then, deductions and understanding of strategies => sure, I still get the idea: high-tax countries = minimized profits >< low-tax countries.
Here is the problem with options: "pay" and "bought" and "price" and "charge" really have done a good job in hypnotizing me.
Intern
Status: Don't watch the clock,Do what it does, Keep Going.
Joined: 10 Jan 2017
Posts: 37
Re: Large corporations use several strategies to minimize their  [#permalink]

### Show Tags

17 Sep 2017, 09:02
The answer boils down to option B and E . Now I chose option E . Why you ask ? I would try to make you understand like i did it myself.

Suppose you own a company A in the US and you have a subsidiary B in India . Now tax in us is higher whereas in India its lower .Thus if you make something in the US you would be taxed more .How could you save money with less tax legally buy it from B in India where tax is less. Hence A pays subsidiary making more profit.
Hope you get it . Kudos
Retired Moderator
Joined: 28 Mar 2017
Posts: 1195
Location: India
GMAT 1: 730 Q49 V41
GPA: 4
Re: Large corporations use several strategies to minimize their  [#permalink]

### Show Tags

17 Sep 2017, 12:56
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?

1. To maximise the profits in low tax countries, the SP (selling price) to the subsidiary in high tax country should be high.
2. To maximise the profits in low tax countries, the CP (selling price) to buy a thing from the subsidiary in high tax country should be low.
3. To minimise the profits in high tax countries, the SP (selling price) to the subsidiary in low tax country should be low.
4. To minimise the profits in high tax countries, the CP (selling price) to buy a thing from the subsidiary in low tax country should be high.

(A) Sell its subsidiary located in a high tax rate country products at low prices -Incorrect. Opposite of 1
(B) Charge its subsidiary located in a low tax rate country higher prices for products sold -Incorrect. Opposite of 2
(C) Pay its subsidiary located in a high tax rate country high prices for products bought -Incorrect. Opposite of 3
(D) Pay its subsidiary located in a low tax rate country low prices for products bought -Incorrect. Opposite of 1
(E) Pay its subsidiary located in a low tax rate country high prices for products bought - Correct. Matches our point 1
_________________
VP
Joined: 12 Dec 2016
Posts: 1493
Location: United States
GMAT 1: 700 Q49 V33
GPA: 3.64
Re: Large corporations use several strategies to minimize their  [#permalink]

### Show Tags

17 Sep 2017, 20:27
this question is not hard, but I am not sure whether this is a gmat question. The passage is summarized into one word "price transfer" and test takers will not need to know what it is.

Options are the key for the right answer. Maximizing the profits can be achieved through products purchased or sold.
If products are purchased, choose the country where the tax payment is low. => E
Manager
Joined: 22 Sep 2018
Posts: 240
Re: Large corporations use several strategies to minimize their  [#permalink]

### Show Tags

18 Jan 2019, 17:08
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 minimize profits in high-tax countries and maximize 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

Here is my reasoning. The last sentence in the passage says "minimize profits in high tax countries and maximize them in low tax ones"

Profit = Revenue - Costs

This means we want:

1) lower revenue and higher costs in high tax countries
2) higher revenue and lower costs in low tax countries

A) In a high tax country, sell products at a low price. This means we are effectively lowering costs for a company in a high tax country. Hence INCREASING profit in a high tax country. WRONG, we want to DECREASE profit.

B) We are increasing costs in a low tax country, thus minimizing our profits. INCORRECT

C) We are increasing revenues in a high tax country, hence maximizing our profits. INCORRECT

D) We are lowering revenues in a low tax country, hence minimizing profits. INCORRECT

E) We are increasing revenue in a low tax country, hence maximizing profits. CORRECT
VP
Joined: 14 Feb 2017
Posts: 1166
Location: Australia
Concentration: Technology, Strategy
Schools: LBS '22
GMAT 1: 560 Q41 V26
GMAT 2: 550 Q43 V23
GMAT 3: 650 Q47 V33
GMAT 4: 650 Q44 V36
WE: Management Consulting (Consulting)
Re: Large corporations use several strategies to minimize their  [#permalink]

### Show Tags

23 Jun 2019, 04:19
Don't overcomplicate it. You just need to apply the rules defined by the stem. No outside knowledge is needed.

Higher revenue = more beneficial to be in lower tax country
Lower revenue = better to be in higher tax country

E - correct. The subsidiary earns more revenue (remember Price*Quantity =Revenue) therefore its more beneficial to be in a lower tax country. E is the only answer that correctly parallels the reasoning/ logic.
_________________
Goal: Q49, V41
Re: Large corporations use several strategies to minimize their   [#permalink] 23 Jun 2019, 04:19

Go to page   Previous    1   2   [ 30 posts ]

Display posts from previous: Sort by