Question: Subsidiary Alpha in Country Able faces a 40 income tax
Subsidiary Alpha in Country Able faces a 40% income tax rate. Subsidiary Beta in Country Baker faces only a 20% income tax rate. Presently each subsidiary imports from the other an amount of goods and services exactly equal in monetary value to what each exports to the other. This method of balancing intra-company trade was imposed by a management keen to reduce all costs, including the costs (spread between bid and ask) of foreign exchange transactions. Both subsidiaries are profitable, and both could purchase all components domestically at approximately the same prices as they are paying to their foreign sister subsidiary. Does this seem like an optimal situation?
Answer to relevant QuestionsSection 482 of the U.S. Internal Revenue Code specifies use of a “correct” transfer price, and the burden of proof that the transfer price is “correct” lies with the company. What guidelines exist for determining the ...Nations typically structure their tax systems along one of two basic approaches: the worldwide approach or the territorial approach. Explain these two approaches and how they differ from each other. How does the diversification of a portfolio change its expected returns and expected risks? Is this in principle any different for internationally diversified portfolios? The currency risk associated with international diversification is a serious concern for portfolio managers. Is it possible for currency risk ever to benefit the portfolio’s return? What are the advantages and disadvantages of serving a foreign market through a greenfield foreign direct investment compared to an acquisition of a local firm in the target market?
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