Question

Assume that a multinational company produces components in country A and ships them to a subsidiary in country B. In order to increase its profits

a. the company should charge a high transfer price for the components if income taxes in country B are higher than in country A.
b. the company should charge a low transfer price for the components if income taxes in country B are higher than in country A.
c. the company should charge a high transfer price for the components if income taxes in country A are higher than in country B.
d. None of these

Answer 1

The company should charge a transfer price based on market prices and not on differences in income taxes between the two countries. Option d is the correct answer.

Step-by-step explanation:

The answer to the question is d. None of these. When a multinational company produces components in one country and ships them to a subsidiary in another country, the company's transfer price for the components should be based on market prices and not on differences in income taxes between the two countries. Charging a high transfer price in a high-tax country or a low transfer price in a low-tax country would not increase the company's profits. Instead, it is important for the company to consider other factors such as production costs, customer demand, and competitive pricing.