In order to maximize profits, multinationals typically use transfer pricing by showing low profits in the high-tax country and by showing high profits in the low-tax country (B). This strategic manipulation of transfer prices allows companies to minimize tax liabilities in high-tax jurisdictions, where they report lower profits, while maximizing profits in low-tax jurisdictions, where they face reduced tax obligations. This practice helps multinationals optimize their overall tax burden and enhance their global financial performance.
Multinational corporations often employ transfer pricing strategies to optimize their global tax position. The objective is to show low profits in high-tax countries and high profits in low-tax countries (Option B). This involves setting prices for transactions between subsidiaries in a way that shifts taxable income to jurisdictions with lower tax rates, minimizing the overall tax liability. The high-tax country may see reduced profits, leading to lower tax payments, while the low-tax country benefits from increased reported profits. This practice, while legal, can raise concerns about tax avoidance and has prompted international efforts to establish guidelines and regulations to ensure fair and transparent transfer pricing practices. Companies may engage in complex financial arrangements and utilize transfer pricing mechanisms to align their profits with favorable tax regimes, allowing them to maximize after-tax returns on a global scale. However, it's essential for policymakers to strike a balance between encouraging international business activities and preventing abusive tax practices, fostering a fair and equitable global tax system.