Suppose Navistar's Canadian subsidiary sells 1,500 trucks monthly to the French affiliate at a transfer price of $27,000 per unit. Assume that the Canadian and French marginal tax rates on corporate income equal 45% and 50%, respectively.
a. Suppose the transfer price can be set at any level between $25,000 and $30,000. At what transfer price will corporate taxes paid be minimized? Explain.
b. Suppose the French government imposes an ad valorem tariff of 15% on imported trucks. How would this tariff affect the optimal transfer pricing strategy?
c. If the transfer price of $27,000 is set in euros and the euro revalues by 5%, what will happen to the firm's overall tax bill? Consider the tax consequences both with and without the 15% tariff.
d. Suppose the transfer price is increased from $27,000 to $30,000 and credit terms are extended from 90 days to 180 days. What are the fund-flow implications of these adjustments?