Explain how companies use transfer pricing between divisions located in diffrent countries to reduce tax payments, and discuss the propriety of this approach.
Transfer pricing is an accounting practice that represents the price that one division in a company charges another division for goods and services provided.
How Companies use transfer Pricing to reduce tax :
1) When transfer pricing occurs, companies can book profits of goods and services in a different country that may have a lower tax rate.
2) In some cases, the transfer of goods and services from one country to another within an interrelated company transaction can allow a company to avoid tariffs on goods and services exchanged internationally.
The three bases commonly used for establishing transfer prices, both for domestic and international transactions, are: (1) cost-based transfer prices, (2) market-based transfer prices, and (3) negotiated prices.
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