Skip to content

ACCA Strategic Professional · Advanced Financial Management · Dividend policy in multinationals and transfer pricing

A multinational group wants to use transfer pricing to move profit to a low-tax subsidiary. Under the OECD arm's length principle, which approach is the tax authorities' expected benchmark for a transfer of goods between group companies?

Tax authorities expect intra-group transfer prices to follow the arm's length principle, meaning the price independent parties would agree in comparable transactions. Prices set purely to minimise group tax, or by arbitrary cost markups, do not satisfy this benchmark.

  1. AThe price that independent parties would agree in comparable transactionsCorrect
  2. BThe full cost of the selling division plus a fixed 10% markup set by head office
  3. CThe price that minimises the group's worldwide tax charge
  4. DThe selling division's variable cost of production

Explanation

The arm's length principle requires intra-group prices to be those independent parties would have agreed in comparable circumstances. Prices chosen to minimise group tax or based on arbitrary markups are not the benchmark, and variable cost ignores comparability.

Did you get it right without looking?

One question tells you little. A timed set on Dividend policy in multinationals and transfer pricing shows your real accuracy, how long you take and where you lose marks.

Practise Dividend policy in multinationals and transfer pricingFree diagnostic mock

More Dividend policy in multinationals and transfer pricing questions