Question

Multinational corporations can reduce their tax liabilities by shifting profits from countries with high corporate taxes to countries with low corporate taxes. For example, a manufacturer with a location in a high-tax country sells a $500 input at a below cost price of $100 to its subsidiary located in a low-tax country, where it is then used to produce a final good. This example describes what economists call ________

tax evasion

depreciation acceleration

double taxation

transfer pricing

cost-basis expensing

Answer 1

The correct answer is Transfer Pricing

Transfer pricing is a practice followed by big corporations where a big corporation may take a loss in a country where the tax rates are high but moves the ownership of profitable assets to overseas subsidiaries where the tax rates are very low and thus earn profits.Transfer pricing has tax advantages and it is often used when companies sell goods within the company but to parts of the company in other international jurisdiction.It is not tax evasion but tax avoidance and is a legal use of tax laws to reduce the burden of tax.