Question

Just type the answer, plz. Firms can reduce the taxes they pay in the U.S. by setting internal transfer prices so the “profit” is earned in countries with low tax rates or by selling themselves to an international firm. What are the ethical pros and cons of these practices?

Answer 1

Solution: Transfer pricing: Transfer pricing is a common method that is used for allocating profits by the parent company among its various subsidiaries within Organization. Few are some ethical pro and cons of these practices. Benefits of transfer pricing: One of the major benefits of these practices is the reduction of income and corporate tax in higher tax countries by charging higher prices of goods that are transferred to lower tax countries, with the help of the practices that the company gets higher profit margins. In the given scenario company has shipped goods into the country where there is a higher tariff rates at minimum transfer prices. So the value of such transaction is low. So here it is proved that there is a reduction in the cost of duty.

Drawbacks of transfer pricing: There may be disputes and differences related to policies and transfer pricing within the subsidiaries organization. Deciding a transfer price is complicated and also a time-consuming process. So it may also incur Additional costs are to maintain a proper record of these transactions. When there is transfer of goods within two interational subsidiaries there may be possibility of having different types of risk involved such as currency risk, credit risk, market risk etc.
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