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IAI Actuarial Core Principles · Business Economics · Globalisation and multinational business

A multinational insurer reports profit of 600 crore from its Indian subsidiary but, through high management fees and transfer pricing to its parent, most of this is shown as profit in a low-tax country. Which cost of globalisation does this illustrate?

This illustrates erosion of the host government's tax base through profit shifting. By using transfer pricing and fees to book profits in a low-tax country, the multinational reduces taxable profit, and tax revenue, in India.

  1. AErosion of the host government's tax base through profit shiftingCorrect
  2. BImproved terms of trade for the host country
  3. CIncreased domestic competition leading to lower prices
  4. DReduction in the host country's trade deficit
  5. Greater labour mobility within the host country

Explanation

Shifting profits via transfer pricing and fees to low-tax jurisdictions reduces taxable profit in the host country, so the host government loses tax revenue. The other options are not what this practice describes.

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