Electrolux—the Swedish multinational manufacturer of household appliances and white goods (refrigerators and washing machines)—manufactures compressors in Kiev (Ukraine) for assembly and distribution in the Poland. Corporate income tax rates are, respectively, 25 and 35 percent in Ukraine and Poland. Make reference to income statements of both affiliates (Exhibit 25. 8) in answering the following:

a. Show how a manipulation of the transfer price between the Ukrainian subsidiary and its Polish sister subsidiary can reduce Electrolux’s consolidated taxes.

Data from Exhibit  25.8

Assume that the Polish subsidiary’s cost of goods sold is entirely accounted for by the compressor imports from Ukraine.

b. The European Union applies a 20 percent ad valorem tax on manufactured goods from Ukraine. Explain how this tax helps or hinders income shifting between the sister subsidiaries.

c. Intracorporate trade is conducted on 90-day credit terms. Electrolux-Ukraine expects the zloty to appreciate in the next three to six months; in which currency would you recommend that the exports shipment to Poland be denominated? Should Electrolux-Poland lead or lag its payment? Should Electrolux-Ukraine lead or lag collection?

Transcribed Image Text:

EXHIBIT 25.8 Electrolux's Income Statements Electrolux- Ukraine (30%) Electrolux- Poland (50%) Electrolux Consolidated Revenue 300 440 440 Less: Cost of goods sold 200 300 200 Gross profit 100 140 240 Less: Operating expenses 20 20 Income before taxes 80 120 40 200 Less: Taxes Net income 265 24 66 60 84 60 116