Question: As indicated in the chapter, determining the appropriate transfer price in a multinational setting is a very complex problem, with multiple strategic considerations. Consider as
As indicated in the chapter, determining the appropriate transfer price in a multinational setting is a very complex problem, with multiple strategic considerations. Consider as an example a U.S. company with a subsidiary in Italy and a subsidiary in Ireland. The Italian subsidiary produces a product at a cost of $1,000 per unit. This unit is then sold to the Irish subsidiary, which adds $100 of cost to each unit. The unit is then shipped to the U.S. parent company, which adds an additional $100 of cost to each unit. The unit is then sold to a U.S. customer for $2,000. Assume that the tax rate in Italy is 30 percent, the tax rate in Ireland is 15 percent, and the tax rate in the United States is 35 percent.
Required
1. Define the term transfer price. Why is the issue of transfer pricing of strategic concern to organizations?
2. Fundamentally, what creates income tax planning opportunities as regards the determination of transfer pricing in a multinational setting? Where could one go to obtain information regarding stated income-tax rates for various countries?
3. Assume that the transfer price associated with the sale to the Irish subsidiary is $1,200, and that the transfer price for the sale to the U.S. parent company is $1,600. Under this situation, what is the income tax paid by each of the following: (a) the Italian subsidiary, (b) the Irish subsidiary, (c) the U.S. parent company, and (d) the consolidated entity (i.e., worldwide tax paid)?
4. Assume now that the transfer price associated with the sale to the Irish subsidiary is $1,100, and that the transfer price for the sale to the U.S. parent company is $1,800. Under this situation, what is the income tax paid by each of the following: (a) the Italian subsidiary, (b) the Irish subsidiary, (c) the U.S. parent company, and (d) the consolidated entity (i.e., worldwide tax paid)?
5. What considerations, including qualitative factors, bear on the transfer-pricing decision in a multinational context?
Step by Step Solution
3.37 Rating (163 Votes )
There are 3 Steps involved in it
1 Transfer prices represent the amount that one division subunit of an organization charges another division subunit of the organization for services and products transferred internally Transfer prices serve the following roles a They provide price data ie inputs for evaluating the financial performance of profit centers and investment centers In the absence of such price information regarding internal exhanges there would be no way to assess the income generated by these subunits of the organization By extension we would not be able to calcuate financial performance metrics such as ROI RI or Economic Value Added EVA b They provide signals to internal units as to when the firm as a whole is better off by having a producing division sell internally rather than externally c They provide the basis for increasing aftertax cash flow by within limits allowed by law helping to minimize income taxes and in an international sense tariffs and import duties d They motivate divisional managers to put forth significant effort Thus the transfer price ... View full answer
Get step-by-step solutions from verified subject matter experts
Document Format (1 attachment)
249-B-M-L-G-M (470).xlsx
300 KBs Excel File
Study Help