Question

1. Multinational corporations often don’t pay taxes proportional with their corporate profit. Explain why.

Answer 1

ANSWER: Multinational companies can apply many schemes for avoiding the payment of taxes in countries where they make huge revenues. The income tax rates vary in different nations. It is beneficial to utilize transfer pricing when the parent company is operating in a jurisdiction where the corporate tax rate is high while the subsidiaries are operation in a jurisdiction where the corporate tax rate is low. Thus, it would becomes desirable from the view point of overall corporate strategy depict the lower profits in high-tax nations and higher profits in low-tax nations.

When the parent company imports the goods and services from subsidiary company for a low price, then the parent company may reduce the price it paid for those transactions while filing the income tax statements. The reduction in the amount of pre-tax profits the parent company with a high corporate tax rate in the jurisdiction therefore decreases the amount that it need to pay in overall corporate taxes. A reduction in the income and corporate taxes in high tax nations with overprice of the items that are transferred to nations with lower rates of tax help multinational corporations to obtain higher profit margins.