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 information regarding stated income tax rates for various countries?3. Assume that the transfer price associated with the sale to the Irish subsidiary is $1,200 and that thetransfer price for the sale to the U.S. parent company is $1,600. Under this situation, compute theincome tax paid by each of the following: (a) the Italian subsidiary, (b) the Irish subsidiary, (c) the U.S.parent company, and (d) the consolidated entity (i.e., total tax paid)?4. Assume now that the transfer price associated with the sale to the Irish subsidiary is $1,100, and thatthe transfer price for the sale to the U.S. parent company is $1,800. Under this situation, compute theincome tax paid by each of the following: (a) the Italian subsidiary, (b) the Irish subsidiary, (c) the U.S.parent company, and (d) the consolidated entity (i.e., total tax paid)?5. What considerations, including qualitative factors, bear on the transfer pricing decision in a multinational context?
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 a
subsidiary in Ireland. The Italian subsidiary produces a product at a cost of $1,000 per unit. This unit
is then sold to the Irish subsidiary, which adds $100 of cost to each unit. The unit is then shipped to
the U.S. parent company, which adds an additional $100 of cost to each unit. The unit is then sold to a
U.S. customer for $2,000. Assume that the tax rate in Italy is 30%, the tax rate in Ireland is 15%, and
the tax rate in the United States is 35%.
Required
1. 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 information regarding stated income tax rates for various countries?
3. Assume that the transfer price associated with the sale to the Irish subsidiary is $1,200 and that the
transfer price for the sale to the U.S. parent company is $1,600. Under this situation, compute the
income tax paid by each of the following: (a) the Italian subsidiary, (b) the Irish subsidiary, (c) the U.S.
parent company, and (d) the consolidated entity (i.e., total tax paid)?
4. Assume now that the transfer price associated with the sale to the Irish subsidiary is $1,100, and that
the transfer price for the sale to the U.S. parent company is $1,800. Under this situation, compute the
income tax paid by each of the following: (a) the Italian subsidiary, (b) the Irish subsidiary, (c) the U.S.
parent company, and (d) the consolidated entity (i.e., total tax paid)?
5. What considerations, including qualitative factors, bear on the transfer pricing decision in a multinational context?
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