Chapter 12 –

International Transfer
Pricing
Multiple Choice Questions
1.
The monetary amount used to record intercompany transactions is
called:
a. exchange rate
b. transfer price
c. conversion rate
d. incremental cost
2.
What is the primary characteristic of a decentralized organization?
a. size of divisions
b. number of divisions
c. delegation of decision making authority
d. diversity of foreign operations
3.
A multinational corporation may attempt to minimize the taxes it pays
in a country with a high effective tax rate by setting a very high transfer
price on goods transferred to a subsidiary in a high-tax country. Why is
this often not successful?
a. Laws in the foreign country may prohibit such a scheme.
b. The high transfer price would actually increase taxes.
c. Foreign exchange losses will eliminate any tax savings.
d. none of the above.
4.
Subsidiary X, located in a country with a 25% corporate income tax rate, and
Subsidiary Y, located in a country with a 35% corporate income tax rate are part
of a decentralized organization. They have been engaged in trade with one
another using a negotiated transfer price of $50 per unit for sales by Subsidiary
X to Subsidiary Y. Pipko, the parent company of both Subsidiary X and Subsidiary
Y recently set a discretionary transfer price of $80 per unit for the transfers
between X and Y. What is advantage of this decision?
a. Net income for Subsidiary X will increase by $30 per unit.
b. Net income for the corporation as a whole will increase by $30 per unit.
c. Net income for the corporation as a whole will increase by $3 per unit.
d. Net income for Subsidiary Y will decrease by $30 per unit.
5.
What is an ad valorem import duty?
a. a requirement that a parent buy the output of a foreign subsidiary
b. a tariff charged by a government on the invoice price of goods
coming into its country
c. a requirement that a subsidiary acquire its material inputs from a
foreign parent
d. a tax charged on intercompany transactions
6.
According to IRS code Section 482, what is the standard used by the IRS
for international transfer pricing?
a. cost-based prices
b. discretionary prices
c. negotiated prices
d. arm's length prices
7.
A cost-plus transfer pricing scheme is allowed by the Internal Revenue
Service when:
a. it is easiest for the taxpayer to calculate.
b. the related party is primarily a sales subsidiary.
c. there is no readily comparable market price and the related buyer
is more than just a distributor.
d. the average industry mark-up is greater than the taxpayer's
standard markup.
8.
What is the advantage of an advance pricing agreement?
a. IRS will not challenge the transfer price after the tax return is filed
if the agreement is followed.
b. World-wide taxes will be minimized.
c. The brief form explaining the transfer price to be used can be
completed with minimal effort by the taxpayer, but will reduce a
tremendous amount of work later.
d. All of the above are advantages of APA.
9.
Which is NOT a common risk associated with local authorities’ scrutiny
of a company’s transfer prices?
a. potential double taxation
b. uncertainty as to the group’s worldwide tax burden
c. problems in relationships with local tax authorities
d. discovery of a tax treaty violation
10.
The comparable uncontrolled transaction (CUT) method is one
alternative for determining an arm's-length transfer price for what kind
of intercompany transaction?
a. interest on intercompany loans
b. sale of tangible property
c. licenses of intangible property
d. intercompany services