Question

1 Briefly explain four reasons why transfer pricing is important for multinational corporations.

2

Identify one of the main advantages and two behavioural implications of the use of the

         following transfer pricing methods:    

         a. Full Cost Based Transfer Price

         b. Negotiation Based Transfer Price

Note: There should be two advantages and four behavioural implications in total – i.e.

      each transfer pricing method will have one advantage and two behavioural implications.

Answer 1

Answer:

Transfer pricing meaning- It is the value attached to the sale of goods and service between the parties that are related to each other. It is the practice that shows the price that one division of a company charges another division for goods and services provided. Transfer pricing is based on market prices. Companies charge lower price of division or subsidiaries in low tax countries and charge higher prices to division in high tax countries because in high tax countries, profit will be lower and in ow tax countries, profit will be higher.

Importance of Transfer pricing- Points are as following:

1. Transfer pricing provides many opportunities to multinational corporations. Multinational corporations are able to maintain their business structure more flexible.
2. This practices reduces the tax for multinational corporations by reducing corporate and income taxes in high tax countries by making the goods overpriced that are transferred to the countries with lower taxation so as to achieve higher profits.
3. This also reduce the duty cost by shipping goods into the countries with high tariffs at minimum transfer price so as to lower the duty based on such transactions.