Suppose a multinational corporation, XYZ Inc., is considering relocating its operations to a new country to reduce
Question:
Suppose a multinational corporation, XYZ Inc., is considering relocating its operations to a new country to reduce its tax liability. The company has identified two potential countries, Country A and Country B, with different tax rates and costs of doing business. XYZ Inc. is trying to decide which country would provide the best overall tax benefits.
The following information is available:
Country A: Corporate tax rate of 20%, annual operating costs of $10 million
Country B: Corporate tax rate of 15%, annual operating costs of $15 million
XYZ Inc.'s projected pre-tax income for the first year of operation is $50 million. The company expects to have a tax loss carryforward of $5 million from the previous year.
a) Calculate XYZ Inc.'s taxable income and income tax liability in each country, assuming the company incurs $40 million in expenses in the first year of operation.
b) Determine in which country XYZ Inc. would have a lower overall tax liability for the first year, assuming the company can carry forward any unused losses for up to five years.
c) Assume that the projected pre-tax income for each of the next five years is $50 million, and that expenses remain at $40 million per year. Calculate the total tax liability for each country over the five-year period, assuming any unused losses can be carried forward to offset future income.
d) Based on your calculations in parts (b) and (c), which country would you recommend to XYZ Inc. as the best location for reducing its tax liability over the five-year period? Show your calculations and explain your reasoning.
Managerial Economics
ISBN: 978-0133020267
7th edition
Authors: Paul Keat, Philip K Young, Steve Erfle