Part A

a) Explain what is meant by the term 'transfer price'. (5 marks)

b) Trendsetter plc have decided to set up a subsidiary in India to produce leather and is

considering the transfer price to charge for the leather produced by the

subsidiary when shipping it to the UK.

The UK tax rate is currently 25%, whereas the Indian tax rate, for the subsidiary,

would be 33%. Trendsetter plc produces footwear from one skin that sells for

80 and incurs additional costs per skin of 30 to produce the footwear. The

Indian subsidiary has additional cost of 200 Rupee to prepare the skin.

Using an exchange rate of Indian Rupees 85 / calculate the total tax payable in

's if the transfer price is either 10.00 per skin or 15.00 per skin. If

Trendsetter plc wishes to minimise global taxes which transfer price should it

use? (15 marks)

c) Explain what is meant by the arm's length rule with respect to transfer pricing

and why governments may insist that multinational organisations use it.

(10 marks)

Part B

d) Describe the following methods of taxing multinational corporations:

i. Worldwide Approach

ii. Territorial Approach (5 marks)

e) Describe the tax incentives a government might offer a multinational company

and explain their potential advantages and disadvantages.