A condition that is conducive to low transfer prices from the parent company to the subsidiary and high transfer prices from the subsidiary to the parent company is where the corporate in-come tax is lower in the subsidiary's country than in the parent country.

Question

Quizplus · Accepted Answer

When the corporate income tax is lower in the subsidiary's country than in the parent country, it creates an incentive for the parent company to use transfer pricing to shift profits to the subsidiary with lower tax rates, leading to lower transfer prices from the parent to the subsidiary and higher transfer prices from the subsidiary to the parent. This is because the parent company can reduce its tax liability by reporting lower profits in the country with the higher tax rate and higher profits in the country with the lower tax rate.

A Condition That Is Conducive to Low Transfer Prices from the Parent