Lahdekorpi OY, a Finnish corporation, owns 100 percent of Three-O Company, a subsidiary
incorporated in the United States.
Required:
Given the limited information provided, determine the best transfer pricing method and the
appropriate transfer price in each of the following situations:
a. Lahdekorpi manufactures tablecloths at a cost of $20 each and sells them to unrelated
distributors in Canada for $30 each. Lahdekorpi sells the same tablecloths to Three-O Company,
which then sells them to retail customers in the United States.
b. Three-O Company manufactures men’s flannel shirts at a cost of $10 each and sells them to
Lahdekorpi, which sells the shirts in Finland at a retail price of $30 each. Lahdekorpi adds no
significant value to the shirts. Finnish retailers of men’s clothing normally earn a gross profit
equal to 40 percent of sales price.
c. Lahdekorpi manufacturers wooden puzzles at a cost of $2 each and sells them to Three-O
Company for distribution in the United States. Other Finnish puzzle manufacturers sell their
product to unrelated customers and normally earn a gross profit equal to 50 percent of the
production cost.
Lahdekorpi OY, a Finnish corporation, owns 100 percent of Three-O Company, a
subsidiary incorporated in the United States.
a. The best transfer pricing method in this case is the comparable uncontrolled price
method. The appropriate transfer price is $30 per tablecloth, the price at which Lahdekorpi sells the
same product to unrelated distributors in Canada. Although a sale to a distributor in Canada and a
sale to a distributor in the United States are not exactly the same, they should be comparable enough
to allow the use of this method.
b. The best transfer pricing method in this scenario is the resale price method. Lahdekorpi
adds no value to the shirts it purchases from Three-O Company before selling them in the Finnish
market. A reasonable gross profit to be earned by Lahdekorpi on sales of shirts can be determined
by referring to the gross profit normally earned by Finnish retailers of men’s clothing. The appropriate
transfer price is $18 [$30 – ($30 x 40%)].
c. The best transfer pricing method in this case is the cost plus method. An acceptable
transfer price is $3 [$2 + ($2 x 50%)]. Both the cost to produce each puzzle and the gross profit
earned by similar companies producing similar products can be reliably determined.
Superior Brakes Corporation manufactures truck brakes at its plant in Mansfield, Ohio, at a cost of
$10 per unit. Superior sells its brakes directly to U.S. truck makers at a price of $15 per unit. It also
sells its brakes to a wholly owned sales subsidiary in Brazil that, in turn, sells the brakes to Brazilian
truck makers at a price of $16 per unit. Transportation cost from Ohio to Brazil is $0.20 per unit.
Superior’s sole competitor in Brazil is Bomfreio SA, which manufactures truck brakes at a cost of $12
per unit and sells them directly to truck makers at a price of $16 per unit. There are no substantive
differences between the brakes manufactured by Superior and Bomfreio.
Required:
Given the information provided, discuss the issues related to using (a) the comparable
uncontrolled price method, (b) the resale price method, and (c) the cost-plus method to
determine an acceptable transfer price for the sale of truck brakes from Superior Brakes
Corporation to its Brazilian subsidiary.
Superior Brakes sells directly to truck manufacturers in the United States, and to its 100%owned sales subsidiary in Brazil. The Brazilian sales subsidiary sells directly to Brazilian
truck makers. Superior Brakes does not sell to unaffiliated distributors in Brazil so there is
no comparable uncontrolled transaction from which a comparable uncontrolled price can be
determined. If Superior Brakes were to sell to unaffiliated truck brake distributors in Brazil,
the price charged could be considered a reliable arm’s length price under the comparable
uncontrolled price method if there are no substantive differences in the terms of the sales.
The resale price method typically is used when the buyer/reseller is merely a distributor of
finished goods and does not add a substantial amount of value to the product. This is true
for Superior’s Brazilian sales subsidiary. To use the resale price method, the final selling
price to uncontrolled parties must be known and an appropriate gross profit for the reseller
must be determinable. Information on an appropriate gross profit markup for distributors of
truck brakes is not provided. The facts of the problem indicate that other than sales in Brazil,
Superior Brakes does not use a distributor but instead sells directly to truck manufacturers.
The only competitor for which information is provided, Bomfreio, also does not use a
distributor for sales of its truck brakes.
Application of the cost plus method requires knowledge of the cost of the product and an
appropriate gross profit markup for sales to distributors made by other truck brake
manufacturers. There is no information provided about gross profit markups on sales
made by other truck brake manufacturers to distributors, so an appropriate gross profit
markup is unknown.
Banff Limited (a Canadian company) imports die-cast parts from its Taiwanese subsidiary that are
used in the production of children’s toys. Per unit, part 169 costs the Taiwanese subsidiary C$10.00
to produce and C$2.00 to ship to Banff Limited. Banff uses part 169 to produce a toy airplane that it
sells to local toy stores for C$52.00 per unit. The following tax rates apply:
Taiwanese income tax 17%
Canadian income tax
26.5%
Canadian import duty 20% of invoice price
Required:
Page 386
a. Determine the total amount of income taxes and import duties paid to the Canadian and
Taiwanese governments if part 169 is sold to Banff Limited at a price of C$20.00 per unit.
b. Determine the total amount of income taxes and import duties paid to the Canadian and
Taiwanese governments if part 169 is sold to Banff Limited at a price of C$30.00 per unit.
c. Explain why the results obtained in parts (a) and (b) differ.
Smith-Jones Company, a U.S.-based corporation, owns 100 percent of Joal SA, located in Guadalajara,
Mexico. Joal manufactures premium leather handbags at a cost of 500 Mexican pesos each. Joal sells
its handbags to Smith-Jones, which sells them under Joal’s brand name in its retail stores in the United
States. Joal also sells handbags to an uncontrolled wholesaler in the United States. Joal invoices all
sales to U.S. customers in U.S. dollars. Because the customer is not allowed to use Joal’s brand name,
it affixes its own label to the handbags and sells them to retailers at a markup on cost of 30 percent.
Other U.S. retailers import premium leather handbags from uncontrolled suppliers in Italy, making
payment in euros, and sell them to generate gross profit margins equal to 25 percent of selling price.
Imported Italian leather handbags are of similar quality
to those produced by Joal. Bolsa SA also produces handbags in Mexico and sells them directly to
Mexican retailers, earning a gross profit equal to 60 percent of production cost. However, Bolsa’s
handbags are of lesser quality than Joal’s due to the use of a less complex manufacturing process,
and the two companies’ handbags do not compete directly.
Required:
d. Given the facts presented, discuss the various factors that affect the reliability of (1) the
comparable uncontrolled price method, (2) the resale price method, and (3) the cost-plus
method.
e. Select the method from those listed in (a) that you believe is best, and describe any adjustment
that might be necessary to develop a more reliable transfer price.
a. (1) The reliability of the comparable uncontrolled price method is reduced by the fact that
Smith-Jones is a retailer of Joal handbags in the United States, whereas Joal’s
uncontrolled customer in the U.S. is a wholesaler. Thus the two customers operate
at different levels of the market and are not strictly comparable. In addition, the
handbags Joal sells to Smith-Jones carry the Joal brand name, whereas the
handbags sold to uncontrolled customers do not. Thus, the product being sold is not
exactly the same, which is especially important in using the comparable uncontrolled
price method.
(2) The reliability of the resale price method is reduced by the fact that other U.S. retailers
of handbags import their product from Italy making payment in euros, whereas SmithJones obtains its product from Mexico making payment in dollars. The other handbag
retailers are exposed to foreign exchange risk and Smith-Jones is not.
(3) The reliability of the cost plus method suffers from the fact that there are no other
companies in Mexico that produce leather handbags of the same quality as Joal due
to Joal’s use of a more complex production process.
b. The resale price method might be the best of the three methods because the comparison
transactions are more comparable than under the other two methods. The major
difference is that other leather handbag retailers are exposed to foreign exchange risk
and Smith-Jones is not. The other retailers should be expected to earn a higher gross
profit on their sales of imported handbags to compensate for this risk. The gross profit
earned by other retailers could be adjusted downward to obtain a more reliable gross
profit for determining an appropriate transfer price for the transaction between SmithJones and Joel under the resale price method.
Raval Company, based in Sydney, Australia, has a wholly owned subsidiary in Singapore. The
Singaporean subsidiary manufactures bicycles at a cost equal to A$20 per bicycle, which it
sells to Raval at an FOB shipping point price of A$100 each. Raval pays shipping costs of
A$10 per bicycle and an import duty of 10 percent on the A$100 invoice price. Raval sells
the bicycles in Australia for A$200 each. The Australian tax authority discovers that Raval’s
Singaporean subsidiary also sells its bicycles to uncontrolled Australian customers at a price
of A$80 each. Accordingly, the Australian tax authority makes a transfer pricing
adjustment to Raval’s tax return, which decreases Raval’s cost of goods sold by A$20 per
bicycle. An offsetting adjustment (refund) is made for the import duty previously paid. The
effective income tax rate in Singapore is 17 percent, and Raval’s effective income tax rate in
Australia is 30 percent.
Required:
f. Determine the total amount of income taxes and import duty paid on each bicycle (in Australian
dollars) under each of the following situations:
1. Before the Australian tax authority makes a transfer pricing adjustment.
2. After the Australian tax authority makes a transfer pricing adjustment (assume the tax
authority in Singapore provides a correlative adjustment).
3. After the Australian tax authority makes a transfer pricing adjustment (assume the tax
authority in Singapore does not provide a correlative adjustment).
g. Discuss Raval Company management’s decision to allow its Singaporean subsidiary to charge a
higher price to Raval than to uncontrolled customers in Australia.
h. Assess the likelihood that the Singaporean tax authority will provide a correlative adjustment to
Raval Company.
a. Computation of the total amount of income taxes and import duty paid on each bicycle:
Before transfer pricing adjustment
Sales
Production cost
Shipping cost
Import duty
Pre-tax income
Income tax rate
Income tax
Singapore
Australia
A$ 100.00
20.00
A$ 200.00
100.00
10.00
10.00
A$ 80.00
30%
A$ 24.00
A$ 80.00
17%
A$ 13.60
Total income tax and import duty
A$ 47.60
2. After transfer pricing adjustment; with correlative adjustment:
Sales
Production cost
Shipping cost
Import duty
Pre-tax income
Income tax rate
Income tax
Singapore
Australia
A$ 80.00
20.00
A$ 200.00
80.00
10.00
8.00
A$ 102.00
30%
A$ 30.60
A$ 60.00
17%
A$ 10.20
Total income tax and import duty
A$ 48.80
3. After transfer pricing adjustment; without correlative adjustment
Sales
Production cost
Shipping cost
Import duty
Pre-tax income
Income tax rate
Income tax
Singapore
Australia
A$ 100.00
20.00
A$ 200.00
80.00
10.00
8.00
A$ 102.00
30%
A$ 30.60
A$ 80.00
17%
A$ 13.60
Total income tax and import duty
A$ 52.20
b. The company obtains very little benefit (A$1.20 per bicycle) from establishing the transfer
price for sales from its Singaporean subsidiary to Raval at a price higher than it ships to
uncontrolled customers in Australia. Management should have known that the sale from
Singapore to unrelated Australian customers would be viewed by the Australian tax
authority as a comparable uncontrolled transaction and that a transfer pricing adjustment
was a possibility. The potential cost to Raval from using an inflated transfer price is that
the Singaporean government might not provide a correlative adjustment. In that case,
the total taxes paid increase by A$4.60 per bicycle, from A$47.60 to A$52.20.
c. Whether the Singaporean tax authority will grant a correlative adjustment might depend
on whether (1) a Singapore-Australia tax treaty exists that obligates the Singaporean tax
authority to consider providing a correlative adjustment and (2) the Singapore tax
authority agrees with the adjustment made by the tax authority in Australia.
ABC Company has subsidiaries in Countries X, Y, and Z. Each subsidiary manufactures one Page 387
product at a cost of $10 per unit that it sells to both of the other subsidiaries. Each buyer then
distributes the product in its local market at a price of $15 per unit. The following information
applies:
Country X
Country Y
Country Z
Income tax rate
20%
30%
40%
Import duty
20%
10%
0%
Import duties are levied on the invoice price and are deductible for income tax purposes.
Required:
Formulate a transfer pricing strategy for each of the six intercompany sales between the three
subsidiaries, X, Y, and Z, that would minimize the amount of income taxes and import duties
paid by ABC Company.
This problem can be solved by determining the relative amount of income taxes and import
duties that will be paid at a low, e.g., $10.00, and a high, e.g., $13.00, transfer price for
each of the six intercompany transactions.
Sale from X to Y. Strategy: transfer at a relatively high price.
Low price: $10.00
High price: $13.00
X
Y Total
X
Sale
10.00
15.00
Sale
13.00
Cost
10.00
10.00
Cost
10.00
Duty rate
10%
Duty rate
Import
0.00
1.00
1.00
Import
0.00
Pre-tax
0.00
4.00
Pre-tax
3.00
Tax rate
20%
30%
Tax rate
20%
Tax
0.00
1.20
1.20
Tax
0.60
2.20
Sale from X to Z. Strategy: transfer at a relatively high price.
Low price: $10.00
High price: $13.00
X
Z Total
X
Sale
10.00
15.00
Sale
13.00
Cost
10.00
10.00
Cost
10.00
Duty rate
0%
Duty rate
Import
0.00
0.00
0.00
Import
0.00
Pre-tax
0.00
5.00
Pre-tax
3.00
Tax rate
20%
40%
Tax rate
20%
Tax
0.00
2.00
2.00
Tax
0.60
2.00
Y
15.00
13.00
10%
1.30
0.70
30%
0.21
Total
Z
15.00
13.00
0%
0.00
2.00
40%
0.80
Total
1.30
0.81
2.11
0.00
1.40
1.40
Sale from Y to X. Strategy: transfer at a relatively low price.
Low price: $10.00
High price: $13.00
Y
X
Sale
Cost
10.00
10.00
15.00
10.00
Duty rate
Import
0.00
20%
2.00
Pre-tax
Tax rate
0.00
30%
3.00
20%
Tax
0.00
0.60
Total
2.00
0.60
2.60
Y
X
Total
Sale
Cost
13.00
10.00
15.00
13.00
Duty rate
Import
0.00
20%
2.60
Pre-tax
Tax rate
3.00
30%
(0.60)
20%
Tax
0.90
(0.12)
0.78
3.38
Y
Z
Total
2.60
Sale from Y to Z. Strategy: transfer at a relatively high price.
Low price: $10.00
High price: $13.00
Y
Z
Total
Sale
10.00
15.00
Sale
13.00
15.00
Cost
Duty rate
10.00
10.00
0%
Cost
Duty rate
10.00
13.00
0%
Import
Pre-tax
0.00
0.00
0.00
5.00
Import
Pre-tax
0.00
3.00
0.00
2.00
Tax rate
Tax
30%
0.00
40%
2.00
Tax rate
Tax
30%
0.90
40%
0.80
0.00
2.00
2.00
0.00
1.70
1.70
Sale from Z to X. Strategy: transfer at a relatively low price.
Low price: $10.00
High price: $13.00
Z
X
Sale
10.00
15.00
Cost
Duty rate
10.00
10.00
20%
Import
Pre-tax
0.00
0.00
2.00
3.00
Tax rate
Tax
40%
0.00
20%
0.60
Total
2.00
0.60
Z
X
Sale
13.00
15.00
Cost
Duty rate
10.00
13.00
20%
Import
Pre-tax
0.00
3.00
2.60
(0.60)
Tax rate
Tax
40%
1.20
20%
(0.12)
2.60
Sale from Z to Y. Strategy: transfer at a relatively low price.
Low price: $10.00
Total
2.60
1.08
3.68
High price: $13.00
Z
Y
Sale
10.00
15.00
Cost
Duty rate
10.00
10.00
10%
Import
Pre-tax
0.00
0.00
1.00
4.00
Tax rate
Tax
40%
0.00
30%
1.20
Total
1.00
1.20
Z
Y
Sale
13.00
15.00
Cost
Duty rate
10.00
13.00
10%
Import
Pre-tax
0.00
3.00
1.30
0.70
Tax rate
Tax
40%
1.20
30%
0.21
Total
1.30
1.41
2.20
2.71
Summary of strategy: X should always transfer at a high price; Z should always transfer at a low price; Y should
transfer to X at a low price and to Z at a high price.
Vlado Corporation (a U.S.-based company) has a wholly owned subsidiary in Moldova that manufactures
insulated wire at a cost of $3 per meter. Vlado imports the insulated wire and sells it to U.S. retailers at
a price of $12 per meter. The following information applies:
United States Moldova
Income tax rate
21%
12%
Import duty rate
20%
—
Withholding tax rate on
—
6%
dividends
Import duties are levied on the invoice price and are deductible for income tax purposes. The
Moldovan subsidiary must repatriate 100 percent of after-tax income to Vlado each year. Vlado
has determined an arm’s-length range of reliable transfer prices to be $5.00–$6.00.
Required:
i. Determine the transfer price within the arm’s-length range that would maximize Vlado’s aftertax cash flow from the sale of insulated wire in the United States.
j. Now assume that the withholding tax rate on dividends is 0 percent. Determine the transfer
price within the arm’s-length range that would maximize Vlado’s after-tax cash flow from the
sale of insulated wire in the United States.
a. U.S. import duty rate is 20%.
The only possible transfer prices that will maximize Vlado’s after-tax cash flow are the two
extremes in the arm’s length range -- $5 or $6.
$5 Transfer Price
$6 Transfer Price
Moldova
U.S.
Total
Sales price
5.00
12.00
12.00
Cost
3.00
5.00
3.00
20%
Duty rate
Import duty
Moldova
U.S.
Total
Sales price
6.00
12.00
12.00
Cost
3.00
6.00
3.00
Duty rate
20%
1.20
1.20
7.80
1.00
1.00
Import duty
8.00
Pre-tax income
3.00
4.80
Income tax rate
12%
21%
Pre-tax income
2.00
6.00
Income tax rate
12%
21%
0.24
1.26
1.50
Income tax
0.36
1.01
1.37
1.76
4.74
6.50
Net income
2.64
3.79
6.43
Withholding tax
rate
6%
Withholding tax
0.16
Dividend (net)
2.48
Total after-tax
cash flow
2.48
Income tax
Net income
Withholding tax
rate
Withholding tax
Dividend (net)
Total after-tax
cash flow
6%
0.11
0.11
1.65
1.65
4.74
6.39
0.16
3.79
6.27
When the U.S. import duty rate is 20%, the lower transfer price of $5.00 results in the
greater amount of after-tax cash flow ($6.39).
b. Withholding tax rate is 0%.
$5 Transfer Price
$6 Transfer Price
Moldova
U.S.
Total
Moldova
U.S.
Total
Sales price
5.00
12.00
12.00
Sales price
6.00
12.00
12.00
Cost
3.00
5.00
3.00
Cost
3.00
6.00
3.00
Duty rate
20%
Import duty
1.00
Duty rate
20%
1.00
Import duty
1.20
1.20
8.00
Pre-tax income
3.00
4.80
7.80
Income tax rate
12%
21%
Pre-tax income
2.00
6.00
Income tax rate
12%
21%
Income tax
0.24
1.26
1.50
Income tax
0.36
1.01
1.37
Net income
Withholding tax
rate
1.76
4..74
6.50
Net income
Withholding tax
rate
2.64
3.79
6.43
Withholding tax
0.00
0.00
Withholding tax
0.00
0.00
1.76
1.76
Dividend (net)
Total after-tax
cash flow
2.64
2.64
Dividend (net)
Total after-tax
cash flow
0%
1.76
4..74
6.50
0%
2.64
3.79
When the Withholding tax rate is 0%, the lower transfer price of $5.00 results in the greater
amount of after-tax cash flow ($6.50).
6.43
Ranger Company, a U.S. taxpayer, manufactures and sells medical products for animals. Ranger holds the
patent on Z-meal, which it sells to horse ranchers in the United States. Ranger Company licenses its
Bolivian subsidiary, Yery SA, to manufacture and sell Z-meal in South America. Through extensive product
development and marketing, Yery has developed a South American llama market for Z-meal, which it
sells under the brand name Llameal. Yery’s sales of Llameal in Year 1 were $800,000, and its operating
expenses related to these sales, excluding royalties, were $600,000. The IRS has determined the
following:
Value of Yery’s operating assets used in the production of Z-meal
$300,000
Fair market return on operating assets
20%
Percentage of Ranger’s worldwide sales attributable to its intangibles
10%
Percentage of Yery’s sales attributable to its intangibles
15%
Required:
Determine the amount that Ranger would charge as a license fee to Yery in Year 1 under the
residual profit split method.
Yery’s operating income, excluding royalties, is $200,000 ($800,000 - $600,000). Under the
residual profit split method, the amount of Yery’s operating income attributable to Yery’s
operating assets is first determined. This amount is $60,000 ($300,000 operating assets x
20% return on operating assets). Therefore, $140,000 of Yery’s operating income is
attributable to intangibles. The next step is to determine how much of this amount is
attributable to Ranger’s intangibles – this is the amount Ranger will charge as a license fee
in Year 1.
Of the portion of Yery’s operating income that is not attributable to a return on Yery’s
operating assets, 40% (10%/25%) is attributable to Ranger’s intangibles and 60% is
attributable to Yery’s intangibles (15%/25%). Under the residual profit split method, Ranger
will charge Yery a license fee of $56,000 ($140,000 x 40%) in Year 1.
Case 9-1 Litchfield Corporation
The memo to Sarah Litchfield should include the following points:
 Section 482 of the U.S. Internal Revenue Code gives the Internal Revenue Service (IRS)
the authority to adjust any intercompany transfer prices that it determines are not at arm’s
length. This would include sales from Litchfield Corp. to its Bahamian subsidiary.
 Treasury Regulations provide guidelines for determining an arm’s length price. These
regulations require use of one of five specified transfer pricing methods to determine the
arm’s length price in the sale of tangible property (including umbrellas). The “best
method” rule requires the company to use the method that provides the most reliable
measure of an arm’s length price given the facts and circumstances surrounding the sale
of umbrellas to the subsidiary in the Bahamas.
 Selling umbrellas to the Bahamian subsidiary at average production cost is not consistent
with any of the five acceptable transfer pricing methods. Each of these methods results
in some amount of profit being allocated to Litchfield Corp. in the U.S.
 The risks associated with using a transfer pricing method that is not sanctioned by
Treasury Regulations are:
 The IRS adjusts the transfer price and allocates some profit from the sale of umbrellas
to Litchfield Corp. in the U.S., thereby increasing Litchfield’s U.S. tax liability.
 The IRS determines that Litchfield has committed a substantial valuation
misstatement and levies a penalty equal to 20% of the underpayment in taxes, or
even worse, the IRS determines a gross valuation misstatement exists and levies a
40% penalty.
 Litchfield Corp. will sell umbrellas to its Bahamian distributor, which then sells to retailers
in the Caribbean. Because Litchfield does not otherwise sell to unrelated wholesalers, a
comparable uncontrolled transaction does not exist. Therefore, the comparable
uncontrolled price method is not feasible. The resale price method might be the best
method under the following conditions: (1) the Bahamian subsidiary simply distributes
Litchfield’s umbrellas without adding significant value and (2) a reliable measure of the
gross profit markup earned by other distributors of umbrellas in the Bahamas can be
determined. The cost plus method might be best if (1) comparable U.S. umbrella
manufacturers exist that sell directly to wholesalers and (2) a reliable measure of the
gross profit markup earned by those manufacturers can be determined.
Case 9-2 International Lamp Company
1. Determine transfer prices under three different methods.
a. Comparable uncontrolled price method
Polampa sells the same product to a related party (Lighting Supermart) and an unrelated
party (Home Store). The sale to Home Store is a comparable uncontrolled transaction. The
comparable uncontrolled price method results in a transfer price of $320.
b. Resale price method
The transfer price under the resale price method can be determined by reviewing the
calculation used by Home Store to determine its retail price of $489.60 per chandelier:
Invoice price
plus: import duty (2% x invoice price)
Total cost
plus: Markup (50% x total cost)
Retail price
$320.00
6.40
$326.40
163.20
$489.60
The relationship between invoice price and retail price can be modeled as:
(x + 0.02x) x 1.50 = y, where x = invoice price and y = retail price.
This can be further reduced as: (1.02x x 1.50) = y or 1.53x = y or x = y/1.53
Lighting Supermart’s retail price is $459. Substituting $459 for y in the formula results in an
invoice price of $300 ($459/1.53). Thus, $300 is the transfer price under the resale price
method.
c. Cost plus method
The transfer price under the cost plus method is determined as follows:
Production cost
$185
plus: Transportation cost
15
Total cost
$200
plus: Markup (40% x total cost)
80
Transfer price
$280
Case 9-2 (continued)
2. Given this set of facts, the highest price ($320 comparable uncontrolled price) results in
the greatest amount of consolidated after-tax net income
Polampa
Lighting
Supermart
ILC
Consolidated
Comparable Uncontrolled Price - $320
Sales Price
Less: Cost of Sales
Less: Transportation Cost
Gross Profit
Less: Import Duty
Taxable Income
Less: Income Tax
$320.00
185.00
15.00
120.00
Net Income
$459.00
320.00
120.00
22.80
139.00
6.40
132.60
27.85
$459.00
185.00
15.00
259.00
6.40
252.60
50.65
$ 97.20
$104.75
$201.95
$300.00
185.00
15.00
100.00
$459.00
300.00
$459.00
185.00
15.00
259.00
6.00
253.00
51.13
$201.87
Resale Price Method Price - $300
Sales Price
Less: Cost of Sales
Less: Transportation Cost
Gross Profit
Less: Import Duty
Taxable Income
Less: Income Tax
Net Income
100.00
19.00
$ 81.00
159.00
6.00
153.00
32.13
$120.87
Cost Plus Method Price - $280
Sales Price
Less: Cost of Sales
Less: Transportation Cost
Gross Profit
$280.00
185.00
15.00
80.00
$459.00
280.00
179.00
$459.00
185.00
15.00
259.00
Less: Import Duty
Taxable Income
80.00
5.60
173.40
5.60
253.40
Less: Income Tax
Net Income
15.20
$ 64.80
36.41
$136.99
51.61
$201.79
3. When Polampa’s profits are repatriated to ILC, the addition of Polish withholding taxes
causes the lowest price ($280 cost plus price method) to yield the greatest amount of aftertax cash flow for ILC.
Transfer Price
$320.00
$300.00
$280.00
Polampa Profit
$97.20
$81.00
$64.80
Less: Withholding Tax (19%)
18.47
15.39
12.31
Net Dividend to ILC
78.73
65.61
52.49
Plus: Lighting Supermart Net Income
104.75
120.87
136.99
ILC Net Cash Flow
$183.48
$186.48
$189.48
4. Even with the Polish withholding tax rate reduced to 5%, the lowest transfer price still results
in the greatest amount of after-tax cash flow for ILC.
Transfer Price
$320.00
$300.00
$280.00
$97.20
$81.00
$64.80
Less: Withholding Tax (5%)
4.86
4.05
3.24
Net Dividend to ILC
92.34
76.95
61.56
Plus: Lighting Supermart Net Income
104.75
120.87
136.99
ILC Net Cash Flow
$197.09
$197.82
$198.55
Polampa Profit