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Chapter 6

Q. 6.CR.12

For a product transferred between two subsidiaries of a multinational firm operating in two foreign countries, how would you set the transfer price to minimize the combined income tax liability?

Step-by-Step

Verified Solution

Set the transfer price to recognize more of the profits in the country with the lower tax rate. If the country of the supplying division has the lower tax rate, a higher transfer price transfers profit to the supplying division and lowers after-tax profit. If the country of the purchasing division has the lower tax rate, a lower transfer price transfers profit to the purchasing division and lowers after-tax profit.