ACCA Advanced Taxation (ATX) Practice Exam

What significant aspect should be noted about transfer pricing and company size?

1. It applies only to small companies

2. It applies regardless of size for certain territories

3. It is applicable to family-owned businesses only

4. It does not apply to international transactions

The correct answer is: It applies regardless of size for certain territories

The appropriate inclusion of transfer pricing in discussions about company size highlights its broader relevance. Transfer pricing refers to the rules and methods for pricing transactions between associated enterprises, such as subsidiaries of a multinational corporation. This concept is crucial for tax compliance and economic interaction, irrespective of the company's size. In many jurisdictions, transfer pricing regulations apply universally to ensure that transactions between related parties are conducted at arm's length, which means the prices should reflect market conditions as if the transactions were between unrelated parties. This principle aims to prevent profit shifting and ensure that tax liabilities are fairly allocated across different regions or countries. The significance of this aspect becomes evident in multinational enterprises, where varying regulations in different territories can affect how companies — regardless of their size — must structure their pricing to comply with local laws. Larger companies are often scrutinized more closely due to the complexity and volume of their transactions, but the principles of transfer pricing are not exclusive to them. Smaller companies that engage in inter-company transactions must also adhere to these regulations, particularly if they are part of a corporate group that crosses international borders. In contrast, the other options indicate a limited or incorrect scope regarding transfer pricing. It’s not restricted to small companies or family-owned businesses, nor does it exclude international transactions, as