Using the facts stated in Exercise, what would be the tax effects of the transfe
ID: 2798233 • Letter: U
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 3,30,000Related Questions
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