4.5 Macroeconomics In A Global Context

Question 1

What is transfer pricing

Answer 1

An accounting technique used by large global (transnational) corporations to reduce the amount of tax they pay

Question 2

How does transfer pricing work in the context of an example

Answer 2

1. A product is made in Ireland (low tax) and sold in France (high tax)
2. The cost of production in Ireland is £100
3. The selling price in France is £200
4. The Irish part of the TNC charges £200 to its subsidiary in France for making the product
5. Therefore there is 0 taxable profits for the French subsidiary
6. The TNC only has to pay the lower tax in Ireland