Question

Crain Company has a manufacturing subsidiary in Singapore that produces high-end exercise equipment for U.S. consumers. The manufacturing subsidiary has total manufacturing costs of $1,600,000, plus general and administrative expenses of $360,000. The manufacturing unit sells the equipment for $2,600,000 to the U.S. marketing subsidiary, which sells it to the final consumer for an aggregate of $3,600,000. The sales subsidiary has total marketing, general, and administrative costs of $210,000. Assume that Singapore has a corporate tax rate of 33% and that the U.S. tax rate is 46%. Assume that no tax treaties or other special tax treatments apply.

Required: What is the effect on Crain Company’s total corporate-level taxes if the manufacturing subsidiary raises its price to the sales subsidiary by 20%? (Do not round intermediate calculations. Input all amounts as positive values.)

J/E's Total from subsidiaries

income prior to increase in transfer price

revenues

direct cost

other cost

profit cost

profit before tax

tax

profit after tax

income after increase in transfer price

revenue

direct coast

other cost

profit before tax

Answer 1

Solution:

Here in this question, we are assuming that in USA there is DTA credit provisions. Hence we are calculating tax paid by Crain Co. in USA after adjusting tax paid by Singapore Subsidiary in Singapore.

Tax Calculation is based on this formula = Tax on total income - tax paid in singapore

Analysis of increament in transfer price: Here after increament of 20% in Singapore subsidiary's transfer price to USA subsidiary there would be lower profit before tax (PBT) of USA Subsidiary and results into lower tax on USA Subsidiary. Excess tax paid in Singapore on increament will be get set-off when we will calculate tax payable by whole group (Crain Co.) in USA. Hence due to increament in transfer price there will be lower tax liability by $ 171,600.