Suppose ABC International Company's Canadian subsidiary sells 1,300 trucks monthly to the French affiliate at a transfer price of $27,000 per truck. The Canadian and French marginal tax rates on corporate income are 45% and 50%, respectively
Assume the transfer price of the trucks can be set at any level between $25,000 and $30,000. Explain the transfer price you will set in order to minimize the total taxes paid by the Company.
What will be an ideal response?
Answer: If the transfer price is marked up from $27,000 to a new price (P) will lead to a monthly tax savings of 1,500($27,000 - P)(.45 - .50). Tax savings are maximized and total taxes paid by the Company are minimized when P is set to $30,000. The overall effect to ABC International Company would be the shift of profits from the higher tax jurisdiction in France at 50% to Canada where profits are taxed at the lower 45%.
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