Global Enterprises has a manufacturing affiliate in Country A that incurs costs

Question

Global Enterprises has a manufacturing affiliate in Country A that incurs costs of $600,000 for goods that it sells to its sales affiliate in Country B. The sales affiliate resells these goods to final consumers for $1,700,000. Both affiliates incur operating expenses of $100,000 each. Countries A and B levy a corporate income tax of 35 percent on taxable income in their jurisdictions. Required: If Global Enterprises raises the aggregate transfer price such that shipments from its manufacturing to its sales affiliate increase from $1,000,000 to $1,200,000, what effect would this have on consolidated taxes?

Explanation / Answer

If 1000000 If 1200000 MFG Dept MFG MFG Selling to selling dept 1000000 Selling to selling dept 1200000 Cost 600000 Cost 600000 Other op cost 100000 Other op cost 100000 Income 300000 Income 500000 Tax 35% 105000 Tax 35% 175000 Selling DEPT If 1000000 If 1200000 Selling 1700000 Selling 1700000 Less Other op cost 100000 Less Other op cost 100000 Less Purchase 1000000 Less Purchase 1200000 Income 600000 Income 400000 Tax @ 35% 210000 Tax @ 35% 140000 Consolidated tax 315000 315000 NO impact on consolidated taxes

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