SECTION A COMPULSORY QUESTION 1 [40 MARKS] B Ltd (B) manufactures toys in the country of Xanten, which has a corporate tax rate of 35%. Manufacturing inputs are purchased from a large pool of suppliers at a cost of $800. Operating costs incurred by B is $100. B sells toys to an associated enterprise, S Ltd (S), in the country of Julian, for $3,000, incurring operating costs of $440. S then sells these toys at arm's length to customers in Julian and overseas. B's accountant has provided you with the following information in connection with different transfer pricing options potentially open to B, where an arm's length price for the sale of toys to S is required: 1. Cost-plus method Under the cost-plus method, verifiable data supports a 40% cost plus mark up as the benchmark for the industry and so for B. 2. Resale price method Here, verifiable data supports a 20% gross margin as the benchmark for the industry and so for S. 3. Transactional net margin method Under this method, a number of different variables are presented: i. S is to be the tested party and verifiable data supports the net profit indicator as a mark-up on operating costs only of 10%. ii. S is to be the tested party and verifiable data supports the net profit indicator as a mark-up on operating costs only of 15%. iii. Where B is to be the tested party and verifiable data supports the net profit indicator as a 10% mark-up on full costs. iv. Where B is the tested party and verifiable data supports the net profit indicator as a benchmark return of 5% net margin or sales. REQUIRED Write an appraisal of the likely transfer pricing implications of adopting the specific transfer pricing methodologies referenced above 1 . to 3 . for the transaction between B and S and a brief consideration of the most appropriate methodology