INTERNATIONAL TAXATION 1. Foreign company (FC) manufacturers eye glass frames. F

Question

INTERNATIONAL TAXATION

1. Foreign company (FC) manufacturers eye glass frames. FC distributes these frames to retailers in the US through its 100 percent owned US subsidiary, Eyewear, Inc. a Delaware corporation. The cost to manufacture its latest design is $30 per frame. FC sells the frames to Eyewear for $300 and Eyewear resells them to US retailers for $325 per frame. The retailers sell all the frames for whatever they can get for each frame. You are the US tax advisor to Eyewear. Based on the above facts do you believe there are any tax issues that need to be reviewed?

Explanation / Answer

FC sells the frames to eyewear (US subsdiary) at 900% margin, Eyewear resells them to US retalier for 325 (8.3%) margin, Tax issued will arise as 30 $ product is sold at $300, the tax authorities would consider the other arms length price transactions,(ie.) the price at which the company would sells it to a non related entity. The Tax computation would then be done based on the Arm lengths price of the transaction.

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