The Price Charged for a Transaction Between Affiliates Is Called

The price charged for a transaction between affiliates is called a transfer price. Setting an appropriate transfer price is sometimes very difficult because both tax authorities in the two countries involved in the transaction want to maximize their own tax revenues and the MNE wants to minimize taxes paid. Several methods have been suggested for setting the transfer price, but in practice, the issue is still controversial. Which of the following statements about transfer prices is not correct?

A) Economic theory suggests that the correct transfer price is the amount an unrelated customer would have to pay in a free market.
B) The Organization for Economic Cooperation and Development (OECD) has suggested that when it is impossible to determine objectively an appropriate arms-length price, the companies should use two other methods to determine the proper transfer price: the resale price method and the cost-plus method.
C) Companies would prefer to use high transfer prices in low-tax countries and low transfer prices in high-tax countries.
D) One way to get agreement about the correct transfer price that should satisfy all parties is to negotiate an advance pricing agreement (APA) .
E) None of the statements above; all are correct.