Miha Ohua is the CFO of a U.S. company that has operations in Europe and Asia. The company has several manufacturing subsidiaries in low-tax foreign countries where the tax rate averages 6%. These subsidiaries purchase raw materials used in the production process from related subsidiaries located in countries where the tax rate averages 33%.
Miha is considering establishing a transfer price for the raw materials so that the higher-tax subsidiaries charge a low price for the raw materials. In this way, little of the profit is left in these subsidiaries, and most of the profits end up in the low-tax subsidiaries. This approach might reduce the U.S. Company’s overall global tax rate. Write a memo to Miha outlining the issues with this plan.