ABCO Corporation has its two wholly owned subsidiaries, Delta and Parry, in Country A and Country B, respectively. Parry purchases a part for its production from Delta. Country B has a higher tax rate than Country A. To minimize the corporation's overall income tax, how should ABCO set its transfer prices between its subsidiaries?
A) Delta should sell parts to Parry at low prices.
B) Delta should sell parts to Parry at high prices.
C) It doesn't matter what transfer price is used because the subsidiaries are part of the same company.
D) Transfer pricing does not affect the total tax paid by the corporation.

Question

Quizplus · Accepted Answer

By setting higher transfer prices, Delta (in the lower-tax Country A) records higher revenues, thus shifting profits from Parry (in the higher-tax Country B) to Delta. This strategy minimizes the overall tax burden for ABCO Corporation by taking advantage of the lower tax rate in Country A.

ABCO Corporation Has Its Two Wholly Owned Subsidiaries, Delta and Parry