Question

Suppose General Motors charges its Mexican subsidiary $1 million for auto assembly equipment that could be purchased on the open market for $800,000. This practice is BEST referred to as:______

Answer 1

Answer: Transfer pricing

Explanation:

Answer 2

Answer:

Transfer pricing

Explanation:

Goods and services move from one unit to another in the same country, it can also move from one country to another. Transfer pricing is used by companies or units that are usually related, to change the prices of goods and services as they move into such units or countries.

Transfer pricing is a strategy used by these companies to gain tax benefits internationally.

For example, General Motors charges a high price for sales of auto assembly equipment for its Mexican subsidiary. This high price will lead to a lower profit for the Mexican subsidiary which would result in a lower tax.

General Motors is using transfer pricing to alter the tax they pay in Mexico by increasing the price of the products in Mexico.