If a U.S. parent is shipping inventory to its Chinese subsidiary at an arbitrarily high transfer price,
A) the U.S. parent will show a lower pre-tax profit.
B) the Chinese government will collect relatively higher income taxes.
C) the U.S. government will collect relatively high import tariffs.
D) the Chinese subsidiary will show relatively lower profits.

Question

Quizplus · Accepted Answer

By setting a high transfer price, the Chinese subsidiary's cost of goods sold increases, reducing its taxable income and thus its reported profits.

If a US Parent Is Shipping Inventory to Its Chinese Subsidiary at Subsidiary