Worldwide Industries. a U.S.-based MNE, currently buys 150,000 chips a month fro

Question

Worldwide Industries. a U.S.-based MNE, currently buys 150,000 chips a month from its British affiliate at $8 per unit. Worldwide then sells these chips for $20 per unit. Production costs borne by the British affiliate are $5 per unit. The U.S. and British corporate tax rates are 45% and 40%, respectively. Suppose the transfer price can be set at any level between $8 and $13. At what transfer price would corporate tax payments be minimized? Calculate the increase in monthly corporate net income using the optimal transfer price.

Explanation / Answer

Transfer price 8 9 10 11 12 13 US- Worldwide Sales (150000 x 20) 3000000 3000000 3000000 3000000 3000000 3000000 Less: Transfer price (150000 x TP) 1200000 1350000 1500000 1650000 1800000 1950000 PBT 1800000 1650000 1500000 1350000 1200000 1050000 Tax @ 45% 810000 742500 675000 607500 540000 472500 PAT 990000 907500 825000 742500 660000 577500 British Sales (150000 x TP) 1200000 1350000 1500000 1650000 1800000 1950000 Less: Transfer price (150000 x 5) 750000 750000 750000 750000 750000 750000 PBT 450000 600000 750000 900000 1050000 1200000 Tax @ 40% 180000 240000 300000 360000 420000 480000 PAT 270000 360000 450000 540000 630000 720000 Total Taxes 990000 982500 975000 967500 960000 952500 AS we can see minimum taxes are at the transfer price of 13. Please provide feedback…. Thanks in advance…. :-) US British Total Net Income at new Transfer price 577500 720000 1297500 Net income at old Transfer price 990000 270000 1260000 -412500 450000 37500 Increase in corporate income by 37500

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