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Medium2 marksMultiple Choice
Performance measurement and controlTransfer PricingInternational Taxation

ACCA · Question 29 · Performance measurement and control

Section B - Case 3: Nordic Components

Nordic Components is a multinational manufacturer. Division A (located in Country X) manufactures electric motors. Division B (located in Country Y) manufactures e-bikes and uses one motor per bike.

Country X has a corporate tax rate of 15%. Country Y has a corporate tax rate of 30%. Head office wants to set a transfer price that minimizes the overall global tax liability for Nordic Components.

Assuming tax authorities allow it, which transfer pricing strategy should Head Office adopt?

Answer options:

A.

Set the transfer price as low as possible to shift profits to Country X.

B.

Set the transfer price as high as possible to shift profits to Country X.

C.

Set the transfer price exactly equal to marginal cost to neutralize tax effects.

D.

Set the transfer price equal to the external market price to ensure tax neutrality.

How to approach this question

Identify the low-tax jurisdiction. You want to maximize profit in the low-tax country and minimize profit in the high-tax country. A high transfer price increases the supplying division's profit.

Full Answer

B.Set the transfer price as high as possible to shift profits to Country X.✓ Correct
To minimize global tax, a multinational company will want to report higher profits in low-tax jurisdictions (Country X, 15%) and lower profits in high-tax jurisdictions (Country Y, 30%). By setting a high transfer price, Division A's revenues (and profits) increase, while Division B's costs increase (reducing its profits). This effectively shifts profit from Country Y to Country X.

Common mistakes

Thinking a low transfer price helps the company because it 'keeps costs down'. It actually shifts profit to the receiving division.
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