Explore BrainMass

Transfer Pricing by Multinational Companies (MNC)

Discuss the use of transfer pricing by multinational companies (MNC).
How might this be used by a MNC when the host country (let's say the USA) has currency devaluations?
How might this be used to avoid/delay taxation?
Please use a subsidiary in a specific country as part of this discussion.

Solution Preview

How Multinational Companies use transfer pricing:

Transfer pricing is implies the pricing charged on a subsidiary of a company by another subsidiary for goods and services. This implies that such prices are mainly at the discretion of the subsidiaries involved. In essence therefore transfer pricing is the means through which a company can be able to switch with ease liquid resources from one subsidiary to another in order to be able to minimize either tax payments for the whole company or reduce the exchange rate risks that faces multinational corporations operating in a wide array of locations (Abdallah, 2004).

In essence therefore, most Multinational companies use transfer pricing in order to be able to boost their profits by lowering the level of taxes they pay where by they transfer a big part of the profits from tax laden regions to subsidiaries located in areas with less tax burdens or no taxes at all. In addition, transfer pricing helps subsidiaries of a company to avoid the declaring losses in the subsidiary that performed poorly. In such a case, there is redistribution company profits through transfer pricing where profits are shifted from one profitable subsidiary to the one making losses (Abdallah, 2004).

Multinational companies also use transfer pricing to escape inflationary pressures and currency fluctuations in a given subsidiary by transferring its liquid resources to another ...

Solution Summary

The solution discusses transfer pricing by multinational companies (MNC).