Question

3. You are transporting semi-finished products from Mauritania to Morocco, two countries in the northern African continent. Mauritania has a tax rate of 50% and Morocco has a tax rate of 30% and Morocco has a 10% duty on any imports.

To save tax and import duties across the countries for your organization would you charge a low transfer price or a high transfer price? Why?

Answer 1

the company should charge low transfer price.

when low price is charged, in mauritania, the company will earn reduced revenue hence reduced profit and so reduced tax will be charge.

at the same time , when low price is charged in morocco, the company will pay less import duty and their cost of goods will be less than that of market. and so the profit will increase. but as the tax rate is low in Morocco , the increased profit will not create much high tax difference and so the company will benefit here.

here, selling at lower rate in morocco will not have any financial effect as loss in mauritania will be equal to the profit in morocco from reduced cost. but due to tax, the company here benefits the tax difference it would have paid if they sold t market price, due to the difference in tax rates between the two countries.