What is the role of Transfer Pricing for taxation of international profits?
Transfer Pricing is a taxation technique used to allocate profits between two or more related businesses in different countries, with the aim of minimizing taxes paid. It can be used to shift profits to tax havens with lower tax rates. In California, Transfer Pricing is a key factor in deciding how much tax a company must pay on its international profits. Under California law, businesses that own, directly or indirectly, at least 10% of an affiliated company in a different country must pay tax on the portion of their profits that are deemed to be generated in California. The portion of international profits that are allocated to California is determined by Transfer Pricing – the process of determining the prices of goods and services traded between related companies. For example, a company based in California may sell raw materials in bulk to its foreign subsidiary for a high price, thus reducing the profits it earns in California and increasing profits in the foreign country, in turn reducing its tax burden. Transfer Pricing can also be used to transfer losses between related companies. For example, if a business has losses in California due to the costs of setting up a subsidiary and those losses cannot be offset by other profits, it may be able to transfer them to a related company in a foreign country, thus reducing its tax bill. In short, Transfer Pricing is an important method of minimizing taxation of international profits in California, and thus plays a key role in helping businesses reduce their tax burden.
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