A multinational firm has operations in Britain and Hong Kong.   The subsidiary in Hong Kong sells goods to the British subsidiary and the goods are then sold in Britain.  The tax rate in Britain is 30% and in Hong Kong the tax rate is 10%.  Neither country gives any credit for taxes paid elsewhere.

Explain in words how the introduction of import duties in Britain would impact the transfer pricing decision?  At what level of import duties will transfer pricing incentives be eliminated, assuming import duties paid in Britain are a tax deductible expense there

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