Briefly discuss some of the general issues of multinational transfer pricing.

Question

What will be an ideal response?

Answer 1

In international transactions, transfer prices may affect tax liabilities, royalties, and other payments because of different laws in different countries (or states). Because tax rates vary among countries, companies have incentives to set transfer prices that will increase revenues (and profits) in low-tax countries and increase costs (thereby reducing profits) in high-tax countries. There is a feeling by some that the tax avoidance caused by foreign companies selling goods to their U.S. subsidiaries at inflated transfer prices artificially reduces the profits of the U.S. subsidiaries and reduces the taxes collected in the U.S. International taxing authorities look closely at transfer prices for companies engaged in related-party transactions that cross national boundaries and frequently companies have to support the transfer price they have chosen.