Drawing on the background facts in Exercises 6 and 7, assume that the manufacturing cost per unit, based on operations at full capacity of 10,000 units, is $60, and that the uncontrolled selling price of the unit in Country A is $120. Costs to transport the goods to the distribution affiliate in Country B are $16 per unit, and a reasonable profit margin on such cross-border sales is 20 percent of cost. Now suppose that Country B levies a corporate income tax of 40 percent on taxable income (vs. 30 percent in Country A) and a tariff of 20 percent on the declared value of the imported goods. The minimum declared value legally allowed in Country B is $100 per unit with no upper limit. Import duties are deductible for income tax purposes in Country B.

Required:
a. Based on the foregoing information, formulate a transfer pricing strategy that would minimize Global Enterprise’s overall tax burden.
b. What issues does your pricing decision raise?