Question

Explain how companies use transfer pricing between divisions located in diffrent countries to reduce tax payments, and discuss the propriety of this approach.

Answer 1

Introduction:

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.