Question 4 (10 marks) ACME corporation (CEO: Coyote) has nationwide operations a

Question

Question 4 (10 marks) ACME corporation (CEO: Coyote) has nationwide operations and branches in many states in USA. Ignore actual taxation jurisdiction and taxation entity A. Suppose that West Virginia (WV) branch (manager: Meme) is subject to a tax rate that is significantly lower than California (CAL) branch's tax rate. When WV branch purchases a component from CAL branch, ACME corporation may have incentive to minimize the corporate income tax in terms of transfer pricing on the component. Consequently, the transfer price of the component would tend to be high or low? Explain briefly (in no more than 3 sentences). (4 marks)

Explanation / Answer

Transfer Price Should be on lower side since California Branch has Higher tax rate & WV branch has lower tax rate. Accordingly when california branch will have lower transfer price it would have low sales and Correspodingly WV branch would have lower purchase and therefore california branch would pay low taxes due to low transfer price.

ACME corporation should fix the compensation of manager of WV branch on the basis of Corporation stock price since when stock price will be high then it would mean better performance of Branch and ultimately higher profits would be earned

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