Multinatl Inc. has a manufacturing facility in Zolondia which incurs costs of $1
ID: 2372017 • Letter: M
Question
Multinatl Inc. has a manufacturing facility in Zolondia which incurs costs of $1,000,000 for goods it sells to its retail outlet in Aborla. The retailer resells these goods to consumers for $2,000,000. Operating expenses in Zolondia and Aborla are $100,000 and $150,000, respectively. Zolondia and Aborla levy a corporate income tax of 30 percent on taxable income in their jurisdictions. 31. If Multinatl Inc. raises its transfer price from $1,300,000 to $1,600,000 for these goods going from Zolondia to Aborla, what effect would this have on total consolidated taxes? 32. If the tax rate were different in each country: Zolondia tax rate = 20 percent and Aborla tax rate = 40 percent, what would be the tax effects of the transfer pricing action? MBA level, please be detailed. Thank youExplanation / Answer
31. If Multinatl Inc. raises its transfer price from $1,300,000 to $1,600,000 for these goods going from Zolondia to Aborla, what effect would this have on total consolidated taxes?
Answer:
It will not affect on total consolidated taxes because tax rate are same in both country
At present
Total consolidated Taxes = (1,300,000-1,000,000-100,000)*30% + (2,000,000-1,300,000-150,000)*30% = $225,000
After raising transfer price
Total consolidated Taxes = (1,600,000-1,000,000-100,000)*30% + (2,000,000-1,600,000-150,000)*30% = $225,000
In both situation total consolidated taxes=$225,000
32. If the tax rate were different in each country: Zolondia tax rate = 20 percent and Aborla tax rate = 40 percent, what would be the tax effects of the transfer pricing action?
At present
Total consolidated Taxes = (1,300,000-1,000,000-100,000)*20% + (2,000,000-1,300,000-150,000)*40% = $260,000
After raising transfer price
Total consolidated Taxes = (1,600,000-1,000,000-100,000)*20% + (2,000,000-1,600,000-150,000)*40% = $200,000
the tax effects of the transfer pricing action would be consolidated tax will decrease = $60,000
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