Using the facts stated in Exercise, what would be the tax effects of the transfe

Question

Using the facts stated in Exercise, what would be the tax effects of the transfer pricing action if corporate income tax rates were 30 percent in Country A and 40 percent in Country B? 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

Tax effect of transfer price action = total tax expense with 1M transfer pricing cost- total tax expense with 1.2M transfer pricing cost

total tax expense with 1M transfer pricing cost:

total tax expense with 1.2M transfer pricing cost:

Tax effects= 330000-310000= 20000

This action resulted in tax expense decrease by 20000

Country A Coountry B Company Manufacturing affiliate Sales affiliate Cost           6,00,000 Transfer cost        10,00,000           1,00,000           1,00,000 Total costs           7,00,000        11,00,000 Sale        10,00,000        17,00,000 Profit before tax           3,00,000           6,00,000 Tax rate 30% 40% Tax              90,000           2,40,000 Total taxes           3,30,000

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