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ACCA Strategic Professional · Advanced Performance Management · Performance optimisation in specific contexts

Brindle Corp, a multinational, operates in a high-tax country (40%) and a low-tax country (15%). Its Division H in the high-tax country is considering setting transfer prices primarily to move profit to the low-tax division. Which is the most significant risk of this policy for performance management?

The main risk is that tax-driven transfer prices distort divisional profit, so managers are appraised on artificial results and lose motivation, while tax authorities may challenge the prices under arm's-length rules and impose adjustments or penalties.

  1. ADivisional profits become distorted, weakening managerial motivation and exposing the group to tax authority penaltiesCorrect
  2. BDivisional managers will have more autonomy than previously
  3. CCapital employed in each division will fall to zero
  4. DExchange rates will become fixed

Explanation

Tax-driven transfer pricing distorts divisional profit, so managers are judged on figures they cannot influence, reducing motivation and fairness. Authorities may also adjust prices under arm's-length rules and impose penalties. The other options are not consequences of the policy.

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