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

Alpha Co (country A, tax rate 30%) sells components to its subsidiary Beta Co (country B, tax rate 20%). Both countries have no withholding taxes on dividends or customs duties. Ignoring all other factors, which transfer pricing policy would minimise the group's total tax bill?

A low transfer price shifts profit from the high-tax seller in country A to the low-tax buyer in country B, where it is taxed at 20% rather than 30%. This minimises group tax, subject to arm's length rules that tax authorities may enforce.

  1. ASet a high transfer price so that profit is concentrated in country A
  2. BSet a low transfer price so that profit is concentrated in country BCorrect
  3. CSet the transfer price at variable cost so both entities earn equal profit
  4. DSet the transfer price equal to the tax rate differential

Explanation

A low transfer price reduces the revenue of the seller in the high-tax country A and lowers its taxable profit, while raising the profit of Beta in low-tax country B. Profit is taxed at 20% instead of 30%. A high price does the opposite and increases group tax.

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