High transfer prices on goods shipped into a subsidiary and low prices on goods imported from it will result in minimizing the tax liability of a subsidiary operating in a country with high income taxes.

Question

Quizplus · Accepted Answer

This is known as transfer pricing manipulation and is a common tax avoidance strategy used by multinational corporations. By inflating the price of goods shipped into a subsidiary, the profits of the subsidiary are reduced, thus reducing its tax liability. At the same time, when goods are imported from the subsidiary, a lower price is used, thereby reducing the profits of the parent company and its tax liability in its home country. This can be an effective way to minimize overall tax liabilities, but it is also subject to scrutiny by tax authorities and may be viewed as tax evasion if found to be abusive or non-compliant with local tax laws.

High Transfer Prices on Goods Shipped into a Subsidiary and Low