Trans Atlantic Metals has two operating divisions. Its forging operation in Finl

Question

Trans Atlantic Metals has two operating divisions. Its forging operation in Finland forges raw metal, cuts it,
and then ships it to the United States where the company's Gear Division uses the metal to produce
finished gears. Operating expenses amount to $10 million in Finland and $30 million in the United States
exclusive of the costs of any goods transferred from Finland. Revenues in the United States are $75
million.

If the metal were purchased from one of the company's U.S. forging divisions, the costs would be $15
million. However, if it had been purchased from an independent Finnish supplier, the cost would be $20
million. The marginal income tax rate is 60 percent in Finland and 40 percent in the United States.

Required
a. What is the company's total tax liability to both jurisdictions for each of the two alternative transfer
pricing scenarios ($15 million and $20 million)?

b. Is it ethical to choose the transfer price based on the impact on taxes?

Explanation / Answer

(a) analyse the tax liabilities in each jurisdiction using the alternate transfer prices.

if the TP is $15 million,the tax liabilities are

Total Tax liabilities = 3,000,000 + 12,000,000 = $15,000,000

(b)if the TP is $20 million,the tax liabilities are

Total Tax liabilities = 6,000,000 + 10,000,000 = $16,000,000

The Total Tax liabilities is highrt if profits are shofted to the country with the higher tax rate.

(b) in general, most of the people will view this as ethical. obviously misstating costs smply to avoid taxes is un ethical n illegal

Finland US Revenues $15,000,000.00 $75,000,000.00 Third Party cost 10000000 30000000 Transferred goods costs
15000000 Total costs $10,000,000.00 $45,000,000.00 Taxable income $50,000,000.00 $30,000,000.00 Tax rate 60.00% 40.00% Tax liabilities $3,000,000.00 $12,000,000.00

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