Question

Miha Ohua is the CFO of a U.S. company that has operations in Europe and Asia. The company has several manufacturing subsidiaries in low-tax foreign countries where the tax rate averages 6%. These subsidiaries purchase raw materials used in the production process from related subsidiaries located in countries where the tax rate averages 33%. Miha is considering establishing a transfer price for the raw materials so that the higher-tax subsidiaries charge a low price for the raw materials. In this way, little of the profit is left in these subsidiaries, and most of the profits end up in the low-tax subsidiaries. This approach might reduce the U.S. company’s overall global tax rate. Write a memo to Miha, outlining the issues with this plan

Answer 1

To,

Miha Ohua

From,

xxxxxx

Date: 26-11-2019

Subject: Issues with proposed plan of transfer pricing.

Sir,

You are about to implement a plan such that to reduce the overall tax impact. But you have not considered the international taxation rules between the both countries. After taking into consideration, i don't think so you will proceed with the plan because we might incur more taxes than you expect if we consider so.

So, please take into account my representation before proceeding further with the implementation of the proposed plan. Perform a detailed analysis on tax implications and do not proceed on cost benefit basis.