Question

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 $320,000. The unit in country X has manufacturing costs of $162,500 for these products. The retail unit in country Y sells the product to final customers for $462,500. 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 $320,000 to $384,000?

2. What would be the effect on Zen’s total taxes if the manufacturing unit raised its price from $320,000 to $384,000 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 "0" 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 Zen's total tax when tax rates are different in countries X and Y

Answer 1

1.

	Country X	Country Y	Total
Sales	320,000.00	462,500.00
Cost of Goods Sold	162,500.00	320,000.00
Gross Profit	157,500.00	142,500.00
Taxes	63,000.00	57,000.00	120,000.00

	Country X	Country Y	Total
Sales	384,000.00	462,500.00
Cost of Goods Sold	162,500.00	384,000.00
Gross Profit	221,500.00	78,500.00
Taxes	88,600.00	31,400.00	120,000.00

2.

	Country X	Country Y	Total
Sales	320,000.00	462,500.00
Cost of Goods Sold	162,500.00	320,000.00
Gross Profit	157,500.00	142,500.00
Taxes	31,500.00	57,000.00	88,500.00

	Country X	Country Y	Total
Sales	384,000.00	462,500.00
Cost of Goods Sold	162,500.00	384,000.00
Gross Profit	221,500.00	78,500.00
Taxes	44,300.00	31,400.00	75,700.00