World Motors assembles automobiles in the United States from engines produced by its subsidiary corporation in Country X.In order to shift its tax liability,World Motors instructs the subsidiary in Country X to overvalue its invoice price of the engines.This is known as:

Question

Quizplus · Accepted Answer

Transfer pricing refers to the practice of setting prices for goods or services exchanged between related companies in order to shift profits from one tax jurisdiction to another. In this scenario, World Motors is instructing its subsidiary in Country X to overvalue the engines it produces, which would shift profits from Country X (where the subsidiary is located) to the United States (where World Motors is headquartered). This allows World Motors to reduce its tax liability in the United States by claiming expenses related to the purchase of the overvalued engines from its subsidiary in Country X.

World Motors Assembles Automobiles in the United States from Engines