Question

What if the two companies were indifferent states or countries? How would the taxing authorities think about this?

Answer 1

If two companies were in different states or countries ,the taxing authority would base its perspective on how the companies are related to each other. If the companies have a normal buyer seller relationship, the authorities would be less worried about evasion of tax as the probability of collusion is much less. However, if the companies have a parent-subsidiary relationship, the authorities would be careful about why they have been incorporated in different countries. It might be seen as a device to avoid taxes if the tax rate in one of the countries is lower.