Question

Varzesh is a sports equipment company with its corporate headquarters in country A and has three wholly owned subsidiaries in countries B, C and D. The corporate income taxes are 21%, 25%, 29% and 22% for countries A, B, C, and D respectively. Varzesh is going to manufacture a new sports ball called Toop in, and only in, one of the three countries: B, C, or D. The manufacturing cost is $100, and it will be sold in equal quantities in all four countries for $370. The transfer price for Toop is $320. There are no other costs or revenues.

1 - Which country is the best choice to manufacture the Toop in order to minimize taxes paid globally?

2 - If Varzesh sells only one unit in each country, then what is the minimum total tax amount paid globally? Enter your answer rounded to the first decimal place.

3 - If the customs authority pushes Varzesh to fix the transfer price at $260, then which country is the best choice to manufacture the Toop in order to minimize taxes paid globally?

4 - If the transfer price is equal to $260, what is the minimum total tax amount paid globally if Varzesh sells only one unit in each country? Enter your answer rounded to the first decimal place.

Answer 1

a)

Let the total production be X

First we assume that product is manufactured in country A and (X/4) is sold in each of the country.

Tax paid in country A=(320-100)*0.21*X+(X/4)*(370-320)*0.21=48.825X

Tax paid in country B=(X/4)*(370-320)*0.25=3.125X

Tax paid in country C=(X/4)*(370-320)*0.29=3.625X

Tax paid in country D=(X/4)*(370-320)*0.22=2.75X

Total tax paid=(48.825+3.125+3.625+2.75)*X=58.325X

Now, we assume that product is manufactured in country B and (X/4) is sold in each of the country.

Tax paid in country A=(X/4)*(370-320)*0.21=2.625X

Tax paid in country B=(320-100)*0.25*X+(X/4)*(370-320)*0.25=58.125X

Tax paid in country C=(X/4)*(370-320)*0.29=3.625X

Tax paid in country D=(X/4)*(370-320)*0.22=2.75X

Total tax paid=(2.625+58.125+3.625+2.75)*X=67.125X

Now, we assume that product is manufactured in country C and (X/4) is sold in each of the country.

Tax paid in country A=(X/4)*(370-320)*0.21=2.625X

Tax paid in country B=(X/4)*(370-320)*0.25=3.125X

Tax paid in country C=(320-100)*0.29*X+(X/4)*(370-320)*0.29=67.425X

Tax paid in country D=(X/4)*(370-320)*0.22=2.75X

Total tax paid=(2.625+3.125+67.425+2.75)*X=75.925X

Now, we assume that product is manufactured in country D and (X/4) is sold in each of the country.

Tax paid in country A=(X/4)*(370-320)*0.21=2.625X

Tax paid in country B=(X/4)*(370-320)*0.25=3.125X

Tax paid in country C=(X/4)*(370-320)*0.29=3.625X

Tax paid in country D=(320-100)*0.22*X+(X/4)*(370-320)*0.22=51.15X

Total tax paid=(2.625+3.125+3.625+51.15)*X=60.525X

Total tax is minimized in case of country A

ii)

Total tax paid in case of country A=(48.825+3.125+3.625+2.75)*X=58.325X

Put X=4

Total tax paid in case of country A=58.325*4=$233.30

iii)

Let the total production be X

First we assume that product is manufactured in country A and (X/4) is sold in each of the country.

Tax paid in country A=(260-100)*0.21*X+(X/4)*(370-260)*0.21=39.375X

Tax paid in country B=(X/4)*(370-260)*0.25=6.875X

Tax paid in country C=(X/4)*(370-260)*0.29=7.975X

Tax paid in country D=(X/4)*(370-260)*0.22=6.05X

Total tax paid=(39.375+6.875+7.975+6.05)*X=60.275X

Now, we assume that product is manufactured in country B and (X/4) is sold in each of the country.

Tax paid in country A=(X/4)*(370-260)*0.21=5.775X

Tax paid in country B=(260-100)*0.25*X+(X/4)*(370-260)*0.25=46.875X

Tax paid in country C=(X/4)*(370-260)*0.29=7.975X

Tax paid in country D=(X/4)*(370-260)*0.22=6.05X

Total tax paid=(5.775+46.875+7.975+6.05)*X=66.675X

Now, we assume that product is manufactured in country C and (X/4) is sold in each of the country.

Tax paid in country A=(X/4)*(370-260)*0.21=5.775X

Tax paid in country B=(X/4)*(370-260)*0.25=6.875X

Tax paid in country C=(260-100)*0.29*X+(X/4)*(370-260)*0.29=54.375X

Tax paid in country D=(X/4)*(370-260)*0.22=6.05X

Total tax paid=(5.775+6.875+54.375+6.05)*X=73.075X

Now, we assume that product is manufactured in country D and (X/4) is sold in each of the country.

Tax paid in country A=(X/4)*(370-260)*0.21=5.775X

Tax paid in country B=(X/4)*(370-260)*0.25=6.875X

Tax paid in country C=(X/4)*(370-260)*0.29=7.975X

Tax paid in country D=(260-100)*0.22*X++(X/4)*(370-260)*0.22=41.25X

Total tax paid=(5.775+6.875+7.975+41.25)*X=61.875X

Total tax is minimized in case of country A

iv)

Total tax paid in country A=(39.375+6.875+7.975+6.05)*X=60.275X

Let X=4

Total tax paid in country A=60.275*4=$241.10