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siushan
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Joined: 29 Nov 2008
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Posts: 40

Posted: 28 Apr 2011 at 06:09 \| IP Logged

I don't understand the meaning of the below paragraph about the transfer pricing.

Transfer selling prices in countries with higher taxes increase the tax burden but also increase the tax protection affroded to foreign subsidiaries operating in other countries, even if those subsidiaris have lower rates.

Should the firm reduce the selling in countries higher taxes by transferring it to the foreign subsidiaries in other countries with lower rates? If so, why is the tax burden increased?

shally
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Joined: 05 Apr 2011
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Posts: 27

Posted: 02 May 2011 at 14:02 \| IP Logged

Hi siushan,

I think I can offer an explanation to your question.For
example, company A (in country with higher
taxes)exporting goods to its foreign subsidiary (where
lower tax rates prevail)will charge lower transfer price
to report less earnings due to high tax rates.
On the other hand, if the subsidiary exports goods to the
parent company, it will charge higher prices and report
the profits in the subsidiary location (with lower tax
rates). The earnings after taxes will be high on the
whole for the company.

Therefore, it is beneficial to reduce selling in
countries with higher taxes.

Hope I make sense..

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