Question

Currency choice
Assume that, to resolve transfer pricing questions, PI Asia and PI North America agree with the taxing authorities in Singapore and the US that the partially completed assemblies will be priced each month at either S$2350 or $1880. On the last day of each month, PI Asia submits an invoice to PI North America and payment is made on that day.

2a. On the last day of July, the exchange rate is USDSGD 1.2650. In which currency should PI Asia invoice the assemblies to minimize the affiliated group’s overall tax liability?

b. On the last day of August, the exchange rate is USDSGD 1.2350. In which currency should PI Asia invoice the assemblies to minimize the affiliated group’s overall tax liability?

c. What is the general rule about the choice of invoice currency when a company from a low tax jurisdiction sell a product to a company in a high tax jurisdiction but can invoice the product in one of two currencies? (It will be either “the company should invoice in the more expensive currency” or “the company should invoice in the more expensive or less expensive currency”.) Explain.

Answer 1

Agreed exchange rate = 2350/1880 = USDSGD 1.25

2a. Since the exchange rate is higher that is SGD got depreciated so invoicing must be done in USD

2b. Since the exchange rate is lower that is SGD got appreciated so invoicing must be done in SGD

2c. The company should invoice n the more expensive currency thus reducing the overall tax burden. Due to expensive currency invoicing, the overall revenue will go down thus reducing the tax liability