In 2000 San Fernando Drilling shipped 300 diamond drill bits to its subsidiary in Ecuador. The drill bits were shipped at San Fernando's cost of $1 million each to avoid Ecuador's duty of 20 percent. In 2000 Ecuador's income tax on foreign subsidiaries was 35 percent, and the U.S. corporate tax rate was 35 percent. In 2001, Ecuador proposed to raise the corporate tax rate to 45 percent, eliminate duties, and impose a 10 percent VAT. The U.S. rate would remain the same.

3. What action (if any) should San Fernando take on its export pricing?

4. What possible U.S. government action may result from your decision in 3?

Answer rating: 100% (QA)

3 San Fernando should increase the transfer price to the price at w... View the full answer