When selling products to a foreign subsidiary, pricing must comply with international tax laws and transfer pricing regulations.
Correct Answer (C - Charge at the Arm’s Length Price)
Arm’s length pricing ensures that transactions between related parties (e.g., parent company and subsidiary) are priced as if they were between unrelated entities.
This helps comply with tax regulations and avoid penalties for manipulating transfer prices to reduce import tariffs.
The OECD Transfer Pricing Guidelines and the IIA Practice Guide: Auditing Global Business Risks recommend using arm’s length pricing to ensure compliance with tax authorities.
Why Other Options Are Incorrect:
Option A (Decrease the transfer price):
Lowering the transfer price may reduce import tariffs but could violate tax laws, leading to legal and financial penalties.
Option B (Increase the transfer price):
Increasing prices may help shift profits but could trigger regulatory scrutiny and additional taxes.
Option D (Charge at the optimal transfer price):
"Optimal" pricing is vague and may not comply with legal transfer pricing standards.
IIA Practice Guide: Auditing Global Business Risks – Covers compliance with international tax and transfer pricing regulations.
OECD Transfer Pricing Guidelines – Establishes arm’s length pricing as the best practice.
Step-by-Step Explanation:IIA References for Validation:Thus, C is the correct answer because arm’s length pricing ensures compliance with tax regulations while minimizing tariff risks.
