ACCA Strategic Professional · Advanced Financial Management · Dividend policy in multinationals and transfer pricing
A multinational faces a government restriction preventing a subsidiary from remitting dividends. Which of the following is a legitimate way of extracting funds using intra-group pricing mechanisms while remaining compliant with the arm's length principle?
Charging arm's length royalties and management fees for genuine services or licensed rights is a compliant way to remit funds despite dividend restrictions. Overpriced goods or fictitious charges breach transfer pricing rules, and tax authorities can adjust them and impose penalties.
- ACharging the subsidiary arm's length royalties and management fees for services genuinely providedCorrect
- BSetting component prices well above market prices to move cash out
- CInvoicing the subsidiary for management charges that match no service
- DDelaying payment of intra-group receivables from the parent indefinitely
Explanation
Royalties and management charges are accepted routes for remitting funds if they reflect real services or intangible rights at arm's length prices. Inflated prices and fictitious charges breach transfer pricing rules and risk penalties, and delaying receivables does not extract funds.
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