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Business Administration QUESTION #9605
Question 1
A multinational corporation transfers its intellectual property to a subsidiary in a low-tax jurisdiction and charges royalties from its high-tax operating subsidiaries to the IP-holding entity. Which international business practice is this, and what is the primary governance concern it raises?
  • Transfer pricing — the manipulation of intra-company transaction prices to shift taxable profits from high-tax to low-tax jurisdictions, raising concerns about tax base erosion in host countries and creating OECD regulatory pressure through the BEPS (Base Erosion and Profit Shifting) framework✔️
  • Vertical FDI — the company is fragmenting its value chain to exploit tax advantages, a legitimate optimization of the international production network
  • Licensing — the parent is monetizing its IP through arm's-length royalty agreements with independent subsidiaries, which is standard commercial practice with no governance concerns
  • Horizontal FDI — the company is replicating its IP-holding function across multiple jurisdictions to access local innovation ecosystems
Correct Answer Explanation
Transfer pricing (specifically IP transfer pricing) is the practice of setting intra-group transaction prices to shift profits to low-tax jurisdictions. It is the dominant mechanism through which multinationals engage in tax avoidance, depriving host and home countries of tax revenue. The OECD's BEPS Action Plan specifically targets this through arm's-length principle enforcement and country-by-country reporting requirements. This is a critical governance and public policy issue in international business.