how do a corporation leverage transfer pricing and how import duties might influence transfer pricing policies?

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Expert Solution

Corporations leverage transfer pricing to make use of the tax rate arbitrage available across the geographies. A multi national company (MNC) will like to allocate higher profits in a geography which has lower incidence of taxes, thereby saving total tax outgo.

So, a higher transfer price ends up reducing the taxable income in the country of import and increases the taxable income in the country of export, that may have lower instances of tax.
Conversely, a lower transfer price ends up increasing the taxable income in the country of import and decreases the taxable income in the country of export.

Thus, this is the way MNCs leverage the transfer price to make use of tax arbitrage.

Transfer pricing not only impacts the level of direct taxes collected by the country but also the indirect taxes such as custom duties or import duties. Government collects such duties by levying certain %age on the import value. For import purposes, the transfer price has a direct impact on the determination of the value of the import.

A lower transfer price results in lower import value and hence lower will be the applicable customs / import duties.
A higher transfer price results in higher import value and hence higher will be the applicable customs / import duties.

jeff jeffy answered 2 days ago

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