Question 23

Transfer Pricing; International Considerations; Strategy As indicated in the chapter, determining the appropriate transfer price in a multinational setting is a very complex problem, with multiple strategic considerations. Consider as an example a U.S. company with a subsidiary in Italy and asubsidiary in Ireland. The Italian subsidiary produces a product at a cost of $1,000 per unit. This unitis then sold to the Irish subsidiary, which adds $100 of cost to each unit. The unit is then shipped tothe U.S. parent company, which adds an additional $100 of cost to each unit. The unit is then sold to aU.S. customer for $2,000. Assume that the tax rate in Italy is 30%, the tax rate in Ireland is 15%, andthe tax rate in the United States is 35%.Required1. Define the term transfer price. Why is transfer pricing strategically important to organizations?2. What creates income tax planning opportunities when determining transfer prices in a multinational setting? Where could one go to obtain…

Yogi Ltd. of Varanasi, India exports "Product X" to YO Ltd of Tokyo, Japan an associated enterprise for 5, 300 per product. Yogi Ltd. also exports similar product to Y Ltd and OY Ltd, who are unrelated for 5, 350 and 5,550 respectively. What is the price considered to compute profits from transaction with YO Ltd?

Which of the following statements regarding forfaiting is/are accurate? A. The costs associated with forfaiting are often higher than conventional financing B. Forfaiting is typically a short-term transaction, less than one year C. Forfaiting is readily available to small businesses D. Forfaiting eliminates commercial, political, and foreign exchange risks E. Both a and d are accurate In international trade disputes, this ADR relies on a third-party doing their analysis alone and imposing a binding decision A. Arbitration B. Mediation C. Litigation D. Conciliation

Headland Corporation wishes to exchange a machine used in its operations. Headland has received the following offers from other companies in the industry. 1. 2. 3. Sage Company offered to exchange a similar machine plus $28,520. (The exchange has commercial substance for both parties.) Pronghorn Company offered to exchange a similar machine. (The exchange lacks commercial substance for both parties.) Stellar Company offered to exchange a similar machine, but wanted $3,720 in addition to Headland's machine. (The exchange has commercial substance for both parties.) In addition, Headland contacted Pearl Corporation, a dealer in machines. To obtain a new machine, Headland must pay $115,320 in addition to trading in its old machine. Machine cost Accumulated depreciation Fair value Headland $198,400 74,400 114,080 Sage $148,800 55,800 85,560 Pronghorn Stellar $188,480 $198,400 88,040 114,080 93,000 117,800 Pearl $161,200 -0- 229,400

Parent Corporation is located in a country with an income tax rate of 40%. Subsidiary Company located in a country with an income tax rate of 25%. The best tax strategy for the enterprise would be to set the transfer prices on sales of goods from the subsidiary to the parent at a price that is a. higher than the price that would be in effect for unrelated parties in an arms length transaction. b. lower than the price that would be in effect for unrelated parties in an arms length transaction. c. equal to the price that would be in effect for unrelated parties in an arms length transaction. d. transfer prices do not affect overall tax paid.

Sheridan Corporation wishes to exchange a machine used in its operations. Sheridan has received the following offers from other companies in the industry. 1. Skysong Company offered to exchange a similar machine plus $26,220. (The exchange has commercial substance for both parties.) 2. Concord Company offered to exchange a similar machine. (The exchange lacks commercial substance for both parties.) 3. Marigold Company offered to exchange a similar machine, but wanted $3,420 in addition to Sheridan's machine. (The exchange has commercial substance for both parties.) In addition, Sheridan contacted Swifty Corporation, a dealer in machines. To obtain a new machine, Sheridan must pay $106,020 in addition to trading in its old machine. Sheridan Skysong Concord Marigold Swifty Machine cost $182,400 $136,800 $173,280 $182,400 $148,200 Accumulated depreciation 68,400 51,300 80,940 85,500 -0- Fair value 104,880 78,660 104,880 108,300 210,900 For each of the four independent situations, prepare…

Sheffield Corporation wishes to exchange a machine used in its operations. Sheffield has received the following offers from other companies in the industry. 2. 3. Tamarisk Company offered to exchange a similar machine plus $30,820. (The exchange has commercial substance for both parties) Vaughn Company offered to exchange a similar machine. (The exchange lacks commercial substance for both parties.) Bramble Company offered to exchange a similar machine, but wanted $4,020 in addition to Sheffield's machine. (The exchange has commercial substance for both parties.) In addition, Sheffield contacted Sunland Corporation, a dealer in machines. To obtain a new machine, Sheffield must pay $124,620 in addition to trading in its old machine. Machine cost Accumulated depreciation Fair valut Sheffield $214,400 80,400 123,280 Tamarisk Vaughn Bramble $160,800 $203,680 $214,400 60,300 95.140 100,500 92,460 123,280 127,300 Sunland $174.200 -0- 247,900 For each of the four independent situations,…

Sheridan Corporation wishes to exchange a machine used in its operations. Sheridan has received the following offers from other companies in the industry. 1. Skysong Company offered to exchange a similar machine plus $26,220. (The exchange has commercial substance for both parties.) Concord Company offered to exchange a similar machine. (The exchange lacks commercial substance for both parties.) 3. Marigold Company offered to exchange a similar machine, but wanted $3,420 in addition to Sheridan's machine. (The exchange has commercial substance for both parties.) In addition, Sheridan contacted Swifty Corporation, a dealer in machines. To obtain a new machine, Sheridan must pay $106,020 in addition to trading in its old machine. Sheridan Skysong Concord Marigold Swifty Machine cost $182,400 $136,800 $173,280 $182,400 $148,200 Accumulated depreciation 68,400 51,300 80,940 85,500 -0- Fair value 104,880 78,660 104,880 108,300 210,900 For each of the four independent situations, prepare the…

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Transfer Pricing; Ethics Zen Manufacturing Inc. is a multinational firm with sales and manufacturing units in 15 countries. One of its manufacturing units, in country X, sells its product to a retailunit in country Y for $300,000. The unit in country X has manufacturing costs of $150,000 for theseproducts. The retail unit in country Y sells the product to final customers for $450,000. Zen is considering adjusting its transfer prices to reduce overall corporate tax liability.Required1. Assume that both country X and country Y have corporate income tax rates of 40% and that no specialtax treaties or benefits apply to Zen. What would be the effect on Zen’s total tax burden if the manufacturing unit raises its price from $300,000 to $360,000?2. What would be the effect on Zen’s total taxes if the manufacturing unit raised its price from $300,000 to$360,000 and the tax rates in countries X and Y are 20% and 40%, respectively?3. Comment on any ethical issues you observe in this case

ABC Inc. produces home appliances and sells them in the U.S. It outsources the production of the appliances to a Vietnamese manufacturer, and the imported appliances are priced in dollars. Its major competitor for appliances is located in China. Based on this information, ABC Inc. is subject to ____ exposure.   A. economic B. translation C. economic and transaction D. transaction

Holyfield Corporation wishes to exchange a machine used in its operations. Holyfield has received the following offers from other companies in the industry. 1.   Dorsett Company offered to exchange a similar machine plus $23,000. (The exchange has commercial substance for both parties.) 2.   Winston Company offered to exchange a similar machine. (The exchange lacks commercial substance for both parties.) 3.   Liston Company offered to exchange a similar machine, but wanted $3,000 in addition to Holyfield’s machine. (The exchange has commercial substance for both parties.) In addition, Holyfield contacted Greeley Corporation, a dealer in machines. To obtain a new machine, Holyfield must pay $93,000 in addition to trading in its old machine.     Holyfield   Dorsett   Winston   Liston   Greeley Machine cost   $160,000   $120,000   $152,000   $160,000   $130,000 Accumulated depreciation   60,000   45,000   71,000   75,000   –0– Fair value   92,000   69,000…

Holyfield Corporation wishes to exchange a machine used in its operations. Holyfield has received the following offers from other companies in the industry. 1.    Dorsett Company offered to exchange a similar machine plus $23,000. (The exchange has commercial substance for both parties.) 2.    Winston Company offered to exchange a similar machine. (The exchange lacks commercial substance for both parties.) 3.    Liston Company offered to exchange a similar machine, but wanted $3,000 in addition to Holyfield’s machine. (The ­exchange has commercial substance for both parties.) In addition, Holyfield contacted Greeley Corporation, a dealer in machines. To obtain a new machine, Holyfield must pay $93,000 in addition to trading in its old machine.     Holyfield   0Dorsett0   0Winston0   0Liston0   0Greeley0 Machine cost   $160,000   $120,000   $152,000   $160,000   $130,000 Accumulated depreciation   60,000   45,000   71,000…

Please answer both subparts. 1. XYZ, an Australian exporter, has entered into a contract to sell goods in 6 months time and will receive USD 1 million for these goods. What type of exposure is this an example of and why? (a) Economic exposure (b) Translation exposure (c) Transaction exposure (d) Competitive exposure 2. How can a firm protect itself against economic exposure? (a) Money market hedges (b) Geographical diversification (c) Forward contract hedges (d) Futures market hedging

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Corporation Y, which is located in the USA, sold merchandise to Poland on credit in a transaction that was settled in Polish Zlotis and will be paid early next year. And you are preparing your financial statements for the current year and the staff in the accounting department is unclear on which method to use to present the balances in dollars. What procedure must be followed to determine the amount to be reported in the financial statement? Remeasurement Currency transfer Coversion Translation

The following are all typical transactions of balance of payment EXCEPT: a. all answers available in the selection are balance of payment transactions. b. a tourist from China purchases souvenirs in Malaysia. c. Auto Bavaria, a Malaysian distributor of the Germany automobiles pays for the orders of vehicles imported from the parent company. d. the Thailand subsidiary of AirAsia pays dividend to the parent company in Malaysia.

Under what pricing conditions is transfer pricing considered to be legal? Examine the consequences of transfer pricing within the automobile industry. What strategies can international companies implement to manage these consequences?