How does the issue of the transfer pricing impact the results of an MNC?
Generally, transfer pricing refers to the price that is charged between parties such as a parent company and foreign entities which it controls in an intercompany transaction. In this regard, transfer pricing affects the results of a MNC in terms of the tax issues relating to such intercompany transactions (John McKinley & CGMA, 2013). Ideally, although the intercompany transactions are usually eliminated when consolidating the results of the MNC, for tax purposes such transactions are not eliminated. The transfer prices directly affect the allocation of the taxable income for the MNC due to the differences in tax jurisdictions and regulations of the MNC and its subsidiaries. Therefore, a MNC transfer pricing policies directly affect its after-tax income to the extent that the taxation rate differ across different national jurisdictions. This means that a MNC operating or having its subsidiaries in high tax jurisdictions is likely to be affected in terms of tax rates and consequently, its profits.