ACCA Strategic Professional · Advanced Financial Management · Dividend policy in multinationals and transfer pricing
Which statement about using transfer pricing to overcome blocked funds is correct?
Raising the prices the parent charges the subsidiary shifts cash to the parent as payment for goods, bypassing dividend limits. However, it risks challenge by tax authorities under arm's length principles and may breach exchange control rules, so it must be used cautiously.
- ARaising transfer prices on goods sold to the blocked subsidiary can move cash out, but may breach tax rules and arm's length requirementsCorrect
- BTransfer prices cannot be used because they are always treated as dividends
- CLowering the price charged by the parent to the subsidiary moves more cash from the subsidiary to the parent
- DTransfer pricing is only relevant where there are no exchange controls
Explanation
Higher prices charged to the subsidiary on goods supplied by the parent move cash out as payment for goods, but tax authorities may adjust under arm's length rules and the host government may treat it as evasion of controls. Lowering the parent's price does the opposite.
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