Q. 17 Multiple Choice (1 Viewer)

A company reduces amount of taxpaid by tranfer pricing. What describes this practice?

  • Redirecting profits to take advantage of tax havens

    Votes: 36 37.1%
  • Buying products from a subsidiary at lowe than market prices

    Votes: 55 56.7%
  • Undercutting a competitor by selling goods at below cost price

    Votes: 2 2.1%
  • Taking advantage of currency fluctuations to buy imported raw materials

    Votes: 4 4.1%

  • Total voters
    97

sando

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ok there's been alot of arguments over this question... so i thought through a poll everyone can vote.. as the majority of people would normally indicate a correct response.. as in past years there has never been a question with <50% chosen and been right


Q. A company reduces the amount of tax it pays by engagin in transfer pricing. Which of the following describes this practice ?

A) Redirecting profits to take advantage of tax havens
B) Buying products from a subsidiary at lowe than market prices
C) Undercutting a competitor by selling goods at below cost price
D) Taking advantage of currency fluctuations to buy imported raw materials


i know its only 1 mark.. but i would still like to find out correct answer..
personally, i chose B
 

snowbunny

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i chose A but im thinking B is correct :(

a refers specifically to tax havens even though they are similar ethical aspects
 

jasonmatthew

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I Agree and say B
And all my arguments that i have said lie in the jacaranda book on page 487.
It says. Transfer pricing probvides the opportunity for the business as a whole to gain while both the buying and selling subsidaries 'lose'. This is because the subsidaries receive a lower price for their product than if the transaction took place on the open market. This effectively hides any profit.

Which is very similar to (b)

"Buying products from a subsidary at lower than market prices".
 

sando

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no offence.. but who's the idiot who chose "C" ?
lol

i meant not what u chose in the exam.. but what u belive is correct answer lol
 

orange_blob

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Sykes Text Book said:
Transfer pricing is where a global business with two or more subsidiaries arranges for the subsidiary in the higher tax country to sell to the subsidiary in the lower tax country products at inflated prices. That way profits in the higher tax country are very low and profits in the lower tax country are very high.
Jacaranda Text Book said:
Transfer pricing provides the opportunity for the business as a whole to gain while both buying and selling subsidiaries 'lose'. This is because the subsidiaries receive a lower price for their product than in the transaction took place on the open market. This effectively hides any profit
I went for A.
 

broady

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A is close, but the subsidaries are not redirecting profits
 

XcarvengerX

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Well, from Jacaranda textbook, I think the writer assumed that the mother company (the headquarter) is in tax haven and the subsidiaries are in high-tax countries whereas Sykes textbook's assumption is the exact opposite. Option B does not give any specification in where the subsidiary is, whereas A is clear that the business redirects its profits to tax haven.

Conclusion, A is a better option than B in my opinion.
 

snapey1389

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I spoke to one of my teachers after the exam who had looked at the paper and he gave me this explanation.

Transfer pricing involves the purchasing of products from subsidaries for lower than market prices in order to make the purchaser more profitable however it also involves the purchasing of products at higher than market prices in order for the subsidiary located in a tax haven or lower taxed country to obtain a higher profit which is ultimately taxed less and means a greater net profit for the business/businesses.

This means that both A and B are correct however it makes A the most correct as what occurs with the purchasing of products from subsidiaries is effectively the redirection of profits and B does not fully answer the question.
 

lisraeli

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i thought this question was one of the clearest/easiest. It's A because thats what transfer pricing is, redicrecting profits in order to minimise profits in a high tax country and maximise them in low tax countrys (eg tax havens) in order to pay least tax.

It usually invovles a subsidary in country B with very low tax levels (eg 5%) selling at inflated prices to country A with high tax levels (eg 30%). This effectively recuded the profit of the higher taxed country and maximises it in the other, hence redirecting profits. In order for B to be correct itd ahve to specify which subsiary's country had higher levels of tax. Thus, the answer is A
 

XcarvengerX

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Yes, this is supposed to be a simple question.

The problem is because option B is not very specific in the location of the subsidiary (in tax haven or high-tax country like I said above), so some argue that B may be the answer to this question. No one argue about option A though, so I don't know why people so against A in this question...
 

namdog

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I put B, and still stand by my decision. I think B describes the PRACTICE more than A, but A describes the theory of it better than B...

anyone understand that? lol
 

sando

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A doesnt mention a subsidiary though.. i thought transfer pricing involved subsidiary
 

jasonmatthew

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Looking at it now, A does make some sense. However I still think that (B) in actual fact describes the practice better than a. The key word is market prices, not the actual firms prices, and thats where i still think it is (B). And they are not redirecting profits, they are hiding profits by getting taxed at a lower rate. Not redirecting and i think the Jacaranda diagram describes this perfectly on page 487
 

XcarvengerX

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Subsidiaries aren't necessary for transfer pricing but subsidiaries help preserve the profit for the business. The question is only asking what the business does to reduce the amount of tax it pays.
 

berra

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nnnnnnnnnnnnnooooooooooooooooooo!!!!! i did b... but now i think the answer's A!!!!!:bomb:
according 2 the leading edge text book:
tranfer pricing: refers to the pricing that measures the value of products provided by a profit centreto another part of the biz. however.... the definition of tax minimisation stats: refers to the legal action of applying accounting standards in a way that produces the lowest taxable profit figure possible. hence, transfer pricing does alter it... which makes the answer (b) correct...

tax havens:refers to a country that imposes low tax rates and consequently attracts international companies to establish operations within its borders such as the cayman islands....

so im really confused atm... im going towards b again. bloody hell, i dnno which answer's correct :mad1:
 

XcarvengerX

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berra said:
nnnnnnnnnnnnnooooooooooooooooooo!!!!! i did b... but now i think the answer's A!!!!!:bomb:
according 2 the leading edge text book:
tranfer pricing: refers to the pricing that measures the value of products provided by a profit centreto another part of the biz. however.... the definition of tax minimisation stats: refers to the legal action of applying accounting standards in a way that produces the lowest taxable profit figure possible for subsidiary in high-tax country or highest taxable profit figure possible for subsidiary in tax haven. hence, transfer pricing does alter it... which makes the answer (b) correct...
Look at the bold part above for clearer definition.
 

sando

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okay i have change my mind..


fuck.


the answer is A
 

jasonmatthew

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If the answer is a, i have one of the worst and misleading textbooks. Still cant believe the ambiguity in the questions.
 

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