ABC Company has two divisions in different foreign countries, X and Y. If X imposes an import duty on goods transferred in from Y, the company has an incentive to set a relatively low transfer price on the transferred goods which will minimize the duty to be paid and maximize overall company profit.

Question

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By setting a low transfer price on goods transferred from division Y to division X, ABC Company can reduce the import duty imposed by country X, as duties are often calculated based on the declared value of goods. This strategy minimizes the total duty paid, thereby maximizing the overall profit of the company by reducing the cost of goods sold in the importing country.

ABC Company Has Two Divisions in Different Foreign Countries, X