Transfer pricing strategies are sensitive internal corporate issues, because successful pricing is a key element in achieving profits. Transfer pricing also helps MNCs determine how company profits are allocated across divisions. Governments show interest in transfer pricing because these prices will decide tax revenues and other benefits. So, many host governments have policing mechanisms to review the transfer pricing policies of MNCs. Transfer pricing has the following objectives:
1 Income tax minimization.
2 Import duty minimization.
3 Avoidance of financial problems.
Income tax minimization Many researchers have singled out tax minimization as an important variable influencing international transfer pricing decisions. Their finding is not surprising, because transfers between related business entities account for approximately 35 percent of total world trade. Economic benefits are immediate if transfer prices can shift profits from a country with a higher tax rate to a country with a lower tax rate. Yet a company using transfer pricing for maximizing profits must balance this approach by having prices that are consistent with the regulations of taxing authorities.
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