Whitehill Chemicals has two operating divisions. Its Formulation Division in the United States mixes, processes, and tests basic chemicals, and then ships them to Ireland, where the company’s Commercial Division uses the chemicals to produce and sell various products. Operating expenses amount to $26 million in the U.S. and $78 million in Ireland exclusive of the costs of any goods transferred from the U.S. Revenues in Ireland are $195 million.

If the chemicals were purchased from one of the company’s Irish mixing divisions, the costs would be $39 million. However, if it had been purchased from an independent U.S. supplier, the cost would be $52 million. The marginal income tax rate is 20 percent in the U.S. and 12 percent in Ireland. 

Required

a. What is the company’s total tax liability to both jurisdictions for each of the two alternative transfer pricing scenarios ($39 million and $52 million)?

b. Is it ethical to choose the transfer price based on the impact on taxes? Explain.