Question

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 retail unit in country Y for $304,000. The unit in country X has manufacturing costs of $152,500 for these products. The retail unit in country Y sells the product to final customers for $452,500. Zen is considering adjusting its transfer prices to reduce overall corporate tax liability.

Required:

1. Assume that both country X and country Y have corporate income tax rates of 40% and that no special tax 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 $304,000 to $364,800?

2. What would be the effect on Zen’s total taxes if the manufacturing unit raised its price from $304,000 to $364,800 and the tax rates in countries X and Y are 20% and 40%, respectively?

Answer 1

1)

	Existing			If changes Done
	Country X	Country Y		Country X	Country Y
Sales Price	364,800.00	452,500.00	Sales Price	364,800.00	452,500.00
Cost	152,500.00	364,800.00	Cost	152,500.00	364,800.00
Margin	212,300.00	87,700.00	Margin	212,300.00	87,700.00
Tax	84,920.00	35,080.00	Tax	84,920.00	35,080.00
Total Tax Burden	120,000.00		Total Tax Burden	120,000.00

2)

	Existing			If changes Done
	Country X	Country Y		Country X	Country Y
Sales Price	364,800.00	452,500.00	Sales Price	364,800.00	452,500.00
Cost	152,500.00	364,800.00	Cost	152,500.00	364,800.00
Margin	212,300.00	87,700.00	Margin	212,300.00	87,700.00
Tax	84,920.00	35,080.00	Tax	42,460.00	35,080.00
Total Tax Burden	120,000.00		Total Tax Burden	77,540.00