Vlado Corporation (a U.S.-based company) has a wholly-owned subsidiary in Moldova that manufactures insulated wire at a cost of $3 per meter. Vlado imports the insulated wire and sells it to U.S. retailers at a price of $12 per meter. The following information applies: 

Import duties are levied on the invoice price and are deductible for income tax purposes. The Moldovan subsidiary must repatriate 100 percent of after-tax income to Vlado each year. Vlado has determined an arm’s-length range of reliable transfer prices to be $5.00–$6.00. 

Required: 

a. Determine the transfer price within the arm’s-length range that would maximize Vlado’s after-tax cash flow from the sale of insulated wire in the United States. 

b. Now assume that the withholding tax rate on dividends is 0 percent. Determine the transfer price within the arm’s-length range that would maximize Vlado’s after-tax cash flow from the sale of insulated wire in the United States.

Transcribed Image Text:

United States Moldova Income tax rate 21% 12% Import duty rate 20% Withholding tax rate on dividends 6% -