Tax considerations

Multinational firms use transfer pricing to move profit out of countries with high taxes to those with low taxes.Suppose that there are two subsidiaries, one in a high-tax country and the other in a low-tax country; if it intends to reduce the combined tax liability of the two subsidiaries (that is, to increase the combined after-tax profit), the subsidiary that is located in the high-tax country will sell goods to the other subsidiary at lower than normal prices and buy from it at higher than normal prices.