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# Large corporations use several strategies to minimize their

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Manager
Joined: 09 Apr 2013
Posts: 148

Kudos [?]: 119 [0], given: 24

Location: India
WE: Supply Chain Management (Consulting)
Re: Large corporations use several strategies to minimize their [#permalink]

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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.
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+1 KUDOS is the best way to say thanks

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Manager
Joined: 22 Aug 2014
Posts: 190

Kudos [?]: 10 [0], given: 49

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

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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.

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Manager
Joined: 08 Sep 2010
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Re: Large corporations use several strategies to minimize their [#permalink]

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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!

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CEO
Joined: 17 Jul 2014
Posts: 2589

Kudos [?]: 379 [0], given: 177

Location: United States (IL)
Concentration: Finance, Economics
Schools: Stanford '20
GMAT 1: 650 Q49 V30
GPA: 3.92
WE: General Management (Transportation)
Re: Large corporations use several strategies to minimize their [#permalink]

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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.

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Director
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Location: United States
GMAT 1: 700 Q49 V33
GPA: 3.64
Re: Large corporations use several strategies to minimize their [#permalink]

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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.

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Intern
Status: Don't watch the clock,Do what it does, Keep Going.
Joined: 10 Jan 2017
Posts: 30

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

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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

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Senior Manager
Joined: 28 Mar 2017
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Re: Large corporations use several strategies to minimize their [#permalink]

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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

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Director
Joined: 12 Dec 2016
Posts: 808

Kudos [?]: 7 [0], given: 744

Location: United States
GMAT 1: 700 Q49 V33
GPA: 3.64
Re: Large corporations use several strategies to minimize their [#permalink]

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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

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Re: Large corporations use several strategies to minimize their   [#permalink] 17 Sep 2017, 20:27

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