Question

In order to see other student's posts, you must post your Initial Discussion Post. I highly recommend you create your response in MSWord, check it for grammer (spelling and context) then cut and paste it into the discussion. Blackboard does not have as accurate proofing mechanism as MSWord. DISCUSSION PROMPT: Explain how companies use transfer pricing between divisions located in different countries to reduce tax payments, AND discuss the propriety of this approach. Remember to use the text and/or outside sources to support your point of view.

Answer 1

Companies utilize transfer pricing to reduce tax payments by shifting profits to lower-tax jurisdictions, a strategy that is legal but can raise moral and regulatory concerns. The practice is regulated under international guidelines, prompting companies to ensure their transfer prices align with market conditions, while national authorities carefully monitor such activities to prevent excessive tax base erosion.

Step-by-step explanation:

Companies use transfer pricing between divisions in different countries as a strategy to minimize their overall tax liability. Transfer pricing refers to the pricing of goods, services, and intangibles between related entities within a multinational enterprise. By setting transfer prices at higher or lower levels, companies can shift profits to jurisdictions with lower tax rates, thereby reducing the taxes they owe in higher-tax countries.

This practice can be controversial, especially when prices set between divisions do not reflect arm's length conditions, meaning they are not in line with what independent entities would have agreed upon. While transfer pricing itself is a legitimate business practice for allocating income within multinational companies, it becomes contentious when used primarily to gain tax advantages, known as tax avoidance.

International guidelines and laws, such as the Organisation for Economic Co-operation and Development (OECD) guidelines, exist to regulate transfer pricing and ensure that firms set transfer prices that are consistent with market conditions.

The propriety of using transfer pricing for tax reduction is a subject of debate. On one hand, companies have a fiduciary duty to their shareholders to legally minimize tax liabilities and increase profitability.

On the other hand, aggressive transfer pricing that leads to significant tax base erosion in a country can be viewed as morally questionable, especially if it deprives governments of revenue needed for public services. As a result, national tax authorities closely scrutinize transfer pricing practices, and companies must maintain detailed documentation to support their pricing strategies.