Question

10. Define transfer pricing. Describe at least two methods of defending transfer prices if they are challenged by tax authorities. How are transfer prices used in managing multinational tax exposures

Answer 1

Answer:

Explanation:

(A) What is Transfer Pricing?

This is an accounting practice that sets prices for goods and services bought and sold between related entities.

(B) Two methods of defending transfer prices if they are challenged by tax authorities:

1. Treating the related or commonly controlled entities as if they are 2 independent entities.

2. Claiming that services rendered between the 2 related entities could not be priced.

(C) How are transfer prices used in managing multinational tax exposures?

- Transfer Prices help reduce import and export duties. They are used to manage multinational tax exposures by exporting or shipping the goods at a low transfer price, to subsidiaries or related entities in countries with high tariff rates.

- It reduces income taxes and corporate taxes in high tax countries, by overpricing goods that are sold/transferred to subsidiaries in countries with low tax rate.