Your two foreign outposts, a branch in Germany and one in Singapore, each have sales of 100. The host-country tax rates are 40 percent and 20 percent, respectively.
(a) If your home country uses the credit system and has a 30 percent tax, how would you (try to) allocate total costs (120) over the two subsidiaries? Assuming an unlimited potential to shift costs, is there an incentive to allocate all costs to one branch?
(b) Assume that your country uses a credit system, and that you have very little leeway in reallocating costs over the two branches. So you consider increasing the transfer price charged by Singapore to Germany. Imports into the European Union are taxed at 25 percent. Would you increase or decrease the transfer price?
(c) In question (b), at what level of the import duty τm is the advantage wiped out?
(d) Same question as (a), except that your home country applies a 90 percent exclusion rule?