- 10 Marks
Question
Kako PLC is a multinational company with production divisions trading in many countries across the globe. Trade takes place between a number of the divisions in different countries, with intermediate products being transferred between them. Where a transfer takes place between divisions trading in different countries, it is the policy of the board of the company to determine centrally the right transfer price without reference to the managers in the division.
Required:
i) Explain THREE possible reasons for Kako PLC to determine transfer prices of goods from the head office.
ii) Explain TWO criticisms of the central determination of transfer pricing.
Answer
- Kako may seek to improve earnings for shareholders by minimizing their worldwide tax liabilities. Transfer prices can be charged in such a way that transfers from a division in a high-tax country to a division in a low-tax country are fixed at high levels and lower transfer prices are set for transfers from a low-tax to a high-tax country.
- The company may also want to use the transfer prices to reduce custom duties and manipulate remittance of dividends.
- Kako PLC may seek to invest in countries where the taxation system is more favorable. For example, Kako might seek relief from taxation for making capital investments in a country and will choose one country in preference to another on the basis of the tax advantages offered.
- Kako PLC wants to ensure that the divisions are all working towards the same target, the benefit of the organization as a whole.
- ii) Distortions in the divisional profit reporting system.
- Divisional autonomy will be undermined if the transfer prices are imposed on the divisional managers.
- Topic: Transfer Pricing
- Series: Nov 2024
- Uploader: Salamat Hamid