External Environment - Transfer Pricing

Question 1

What is Transfer Pricing ?

Answer 1

• Multi-national companies transfer goods and services between their parent company and their foreign operations
• Multinational companies use transfer pricing to reduce their tax liability by setting a high transfer price in high tax countries and a low transfer price in low tax countries.

Question 2

The effect of transfer pricing on the Host country Advs & Dvds

Answer 2

• GNP will increase, this is the measure of a countries economic performance. A higher GNP shows shows strong economic activity which results in further investment in that country
• More direct employment opportunities are created by the multinational and many indirect jobs are created as a consequence. Employees learn new skills
• Standard of living improves due to wealth creation from better employment as in general foreign owned firms pay higher wages than domestically owned firms
• Tax raised from multinationals profits is a source of revenue for the government.

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• Multinational profits are repatriated to the home country - this means some of the profits can be returned to the home country and not reinvested in the home country.
• Local companies may be forced to close because they cannot compete with larger companies
• Local governments can feel pressure from large MNCs to offer incentives to keep them operating within the country.

Question 3

The effect of transfer pricing on the Home country Advs & Dvds

Answer 3

• Demand for home country exports can increase if foreign subsidiary creates a demand for them
• Other firms in the home country may gain opportunities from any expertise gained which will in turn create wealth for the country in the form of increased taxation collected
• People seeking further and higher education due to less demand for unskilled labour - as unskilled work moves abroad UK citizens will retrain, benefitting themselves as well as the taxation received by government.

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• Employment opportunities may be reduced as MNCs wind down operations leading to less tax revenue for government and increased spending on unemployment benefits
• Increased burden on government to provide college and university places
• Increased burden on government to provide training and skills development to help workers find suitable jobs