Trans Atlantic Metals has two operating divisions. Its forging operation in Finl

Question

Trans Atlantic Metals has two operating divisions. Its forging operation in Finland forges raw metal, cuts it, and then ships it to the United States where the company’s Gear Division uses the metal to produce finished gears. Operating expenses amount to $20.4 million in Finland and $60.4 million in the United States exclusive of the costs of any goods transferred from Finland. Revenues in the United States are $154 million.

If the metal were purchased from one of the company’s U.S. forging divisions, the costs would be $30.4 million. However, if it had been purchased from an independent Finnish supplier, the cost would be $40.4 million. The marginal income tax rate is 70 percent in Finland and 30 percent in the United States.

Required:

What is the company’s total tax liability to both jurisdictions for each of the two alternative transfer pricing scenarios ($30.4 million and $40.4 million)? (Enter your answers in dollars and not in millions of dollars.)

Explanation / Answer

If transfer price is 30.4 million, the tax liability will be 25960000

If transfer price is 40.4 million, the tax liability will be 29960000

Finland US Sales revenue 30400000 154000000 Third party cost 20400000 60400000 Transfer cost 30400000 Total cost 20400000 90800000 Taxable income 10000000 63200000 Tax rate 70% 30% Tax liability 7000000 18960000 Total tax liability 25960000

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