Question

e Chapter 17 and 19 Homew... X Tools Help a AFCC WEBSITE Property management se e Suggested Sites - WebSlice Gallery 17 and 19 Homework (Managerian Saved Zen Manufacturing Inc. is a multinational firm with sales and manufacturing units in 15 countries. One of its manufacturing units, in country X, sells its product to a retail unit in country Y for $332,000. The unit in country X has manufacturing costs of $170,000 for these products. The retail unit in country Y sells the product to final customers for $470,000. Zen is considering adjusting its transfer prices to reduce overall corporate tax liability Required: 1. Assume that both country X and country Y have corporate income tax rates of 40% and that no special tax treaties or benefits apply to Zen, What would be the effect on Zen's total tax burden if the manufacturing unit raises its price from $332,000 to $398,400? 2. What would be the effect on Zen's total taxes if the manufacturing unit raised its price from $332,000 to $398,400 and the tax rates in countries X and Y are 20% and 40%, respectively (For all requirements, leave no cell blank; if there is no effect enter "o" and select "No effect" from dropdown.) 1. Effect on Zen's total tax when tax rates are same in both the countries 2. Effect on Zon's lotal tax when tax rates are different in countries X and Y Proy2 of 2 Next

Answer 1

Answer:

1. Manufacturing Unit in country X is selling to Retail unit in country Y.

Sales amount = $332,000

Manufacturing cost = $170,000

Manufacturing unit in country X profit = Sales amount – manufacturing cost

                                                                           = $332,000 - $170,000

                                                                          = $162,000

Tax Expense = 40% * 162,000

                        = 64,800

Again the retail unit in country Y sells it to final customer for $470,000

Retail unit in country Y profit = Sales amount – Purchasing price

                                                        = $470,000 – 332,000

                                                          = $138,000

Tax expense = 40% * 138,000

                         = $55,200

Total corporate tax liability = $64,800 + $55,200

                                                      = $120,000

If the manufacturing unit raises its price from $332,000 to $398,400, then

Manufacturing unit in country X profit = $398,400 - $170,000

                                                                           = $228,400

Tax expense = 40% * $228,400

                         = $91,360

Retail unit in country Y profit = $470,000 – $398,400

                                                          = $71,600

Tax expense = 40% * 71,600

                         = $28,640

Total Corporate tax liability = $91,360 + $28,640

                                                      = $120,000

2. Tax rate in country X is 20% and in country Y is 40%

The profit for both manufacturing unit and retail unit will be same as calculated before.

Tax expense for manufacturing unit in country X @ 20% = 20% * $228,400

                                                                                                                = $45,680

Tax expense for retail unit in country Y @ 40% = $28,640

Total corporate tax liability = $45,680 + $28,640

                                                      = $74,320

1.	Effect on Zen’s total tax when tax rates are same in both the countries	0	No effect
2.	Effect on Zen’s total tax when tax rates are different in countries X and Y	- $45,680	Tax liabilities decreases