![]() ![]() These rules exist because there can be strong incentives for companies to inflate the prices of goods and services sold across borders, especially when there is a huge difference between the corporate tax rates in different countries.Īfter accounting for municipal trade taxes, the combined corporate income tax A corporate income tax (CIT) is levied by federal and state governments on business profits. Because intracompany transactions are not priced on the market, there are standards for determining what price the Polish or Slovakian subsidiary should charge the parent company in Germany. This is where the tax concept of transfer pricing comes in. Without a guide to what the price should be or what the tax consequences of that transfer are, the intracompany trade could sit in a gray area. Purposes, what price should the Slovakian and Polish subsidiaries charge for the products sold to the German assembly plant? In a sense this would be like your right hand selling a service to your left hand. For instance, a German manufacturer could have subsidiaries in Slovakia and Poland that make parts used in a product that is assembled in Germany.įor tax A tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. This can happen in the normal order of business where a large manufacturer has subsidiaries in different countries each making component parts of a larger product. ![]() When businesses operate in multiple countries, they regularly provide products and services to themselves. ![]()
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