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In: Operations Management

A subsidiary, XYZ, of a large corporation, BETA Inc, provided services to the other subsidiaries of...

A subsidiary, XYZ, of a large corporation, BETA Inc, provided services to the other subsidiaries of BETA Inc. A strategy was deployed whereby XYZ'S transfer pricing of services provided was vastly inflated reducing the profits of the other subsidiaries and affected the performance bonuses of the other subsidiaries employees.

What ethical and legal issues can you identify with this practice?

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Expert Solution

The ethical and legal issue which is being compromised in the above mentioned practice is "Transfer Pricing".

Transfer pricing refers to the transfer of prices within the subsidiaries of the same multi- national companies (MNC). It is the situation where the subsidiaries of the same MNC are treated and measured as separate identities and they all function as separate units/ organizations.

The purpose of using the techniques of transfer pricing is to reduce the tax burden from one MNC and distribute it to separately shown subsidiaries. This practice is not ethical and it hinders the legal aspects of tax laws as well. Following transfer pricing always results into the gain of one subsidiary and the loss of some other subsidiary in terms of low profits and revenue generation.

This is considered as a tax fraud as subsidiaries will be seen as a separate entity and therefore will file tax return separately (with less revenue/ profits shown in the books), instead of the entire MNC filing the tax return as a one group ( including all subsidiaries) and coming under the wider tax slab.

keosha answered 2 days ago
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