Komandor Sa Essay

662 Words Apr 21st, 2014 3 Pages
Comparison of the different alternatives:
1. Capitalize the consulting fees:
In this case, the Profit Before Tax (PBT) would have been higher by $200,000. Therefore, they would have paid 28% x $200,000 = $56,000 in taxes. The Net Income (NI) would have been increased by $144,000.
2. Allocate the consulting fees to the plastic products:
Before allocating the fees, Komandor was buying 500,000 units at $0.45$/unit  duty fees = 500,000 x $0.45 x 0.09 = $20,250
If Komandor allocates the consulting fees to the plastic products, we have to find the new price P ($/unit) of the product such as 500,000 x $0.45 + $200,000 = 500,000 x P  P = $0.85/unit
So, the duty fees become = 500,000 x $0.85 x 0.09 = $38,250
Therefore, the increase in cash
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becomes higher than $200,000, any profit beyond this amount would be taxed at 40%. So, if the alternative #5 makes the PBT higher than $200,000, we have to consider another tax saving = $200,000 (40%-28%).
# 1 2 3 4 5
Advantages • Compliance with tax authorities
• Simplicity • Difficult to locate the fees by the auditors
• Lower tax outflow • Difficult to locate the fees by the auditors (more difficult than #2 because doesn’t increase the price as much)
• Lower tax outflow (but higher than #2) • Simplicity
• No legal issue as long as the auditor is trustworthy
• Cheapest alternative • Simplicity
• No legal issue
Disadvantages • Higher cash outflow due to taxes
• Bad allocation of costs (higher income for Komandor “wrongly attributed”) • Increase of almost 100% in product price due to a wrong allocation of costs
• Legal fees if an auditor find the trick • Smaller increase of product price than #2 but still wrong allocation of costs
• Legal fees if an auditor find the trick • Bribes to be paid in the future?
• Ethic? • Not appropriate cost allocation
• Lower advantage due to lower tax in Canada
• Issue with Canadian authorities for lowering “artificially” the PBT?
Selection of the best option:
We would chose #5 to lower the PBT of Euro Connection in order to be under the $200,000 limit and get a good tax saving (40% compare to 21%). The only risk is the potential problem with the Canadian tax…

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