ABCO Corporation has a parts division in country A. Its assembly division is in country B,which has a higher tax rate than country A. To minimize the corporation's overall income tax,how should ABCO set its transfer prices between its parts and assembly divisions?

Question

Quizplus · Accepted Answer

To minimize the overall income tax, the parts division should sell parts to the assembly division at high prices. This will increase the cost of goods sold (COGS) for the assembly division, resulting in lower profits and ultimately lower taxes in country B. The higher profits from the parts division in country A will be offset by the lower profits from the assembly division, leading to an overall reduction in the corporation's income tax.

ABCO Corporation Has a Parts Division in Country A