Question

A Japanese MNC which manufactures the same component which is used in the Printer and Scanners of SCI, has a manufacturing unit in India and is ready to supply the same component to the Indian subsidiary of SCI at 320 per unit. The SCI is examining the proposal of the Japanese manufacturer and asked its Chines subsidiary to presents its views on this issue. The Chinese subsidiary of the SCI has informed at the same price i.e. \ 30 per unit but it will incur inland taxes @ 10% on sales value. that it will be able to sell 1,20,000 units of the components to the local Chinese manufactures Variable cost per unit of manufacturing the component is \ 20 per unit. The Fixed Costs The Corporation tax rates and currency exchange rates are as follows: International Transfer Pricing 7. Standard Corporation Inc. (SCI) is a US based multinational company engaged in manufacturing and marketing of Printers and Scanners. It has subsidiaries spreading across the world which either manufactures or sales Printers and Scanners using the brand name of SCI. The Indian subsidiary of the SCI buys an important component for the Printers and Scanners from the Chinese subsidiary of the same MNC group. The Indian subsidiary buys 1,50,000 units of components per annum from the Chinese subsidiary at CNY (¥) 30 per unit and pays a total custom duty of 29.5% of value of the components purchased. Corporation Tax Rates Currency Exchange Rates China = 61.50 25% 1 US Dollar ($) = ¥ 6.25 34% 1 US Dollar ($) USA = 9.80 40% 1 CNY (¥) Required (i) PREPARE a financial appraisal for the impact of the proposal by the Japanese manufacturer to supply components for Printers and Scanners to Indian subsidiary of SCI. [Present your solution in Indian Currency and its equivalent.) (ii) IDENTIFY other issues that would be considered by the SCI in relation to this proposal. (Note: While doing this problem use the only information provided in the problem itself and ignore the actual taxation rules or treaties prevails in the above mentioned countries) 이 the subsidiaries will remain unchanged. India

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Answer 1

The fiscal policy in China: If the Government of China liberalize its fiscal policies in Apart from above suggestive points the foreign relations and other tax treaties and (i) Impact of the Proposal by the Japanese Manufacturer to Supply Components for Printers and Scanners to the Indian Subsidiary of the SCI. On Indian Subsidiary of SCI Particulars Amount (3) Cost of Purchase from the Chinese Manufacturer : Invoiced Amount {(1,50,000 units * # 30) * *9.80) 4,41,00,000 Add: Total Custom Duty ( 4,41,00,000 29.5%) 1,30,09,500 Total Cost of Purchase from the Chinese Manufacturer ...(A) 5,71,09,500 Cost of Purchase from Japanese Manufacturer in India: Invoice Amount (1,50,000 units * 320) 4,80,00,000 Total Cost of Purchase from Japanese Manufacturer in India ...(B) 4,80,00,000 Savings on Purchase Cost Before Corporate Taxes ...(A) – (B) 91,09,500 Less: Corporate Tax @34% 30,97,230 Savings after Corporate Taxes 60,12,270 On Chinese Subsidiary of SCI Particulars Amount (3) 29,40,000 35,28,000 Loss of Contribution [{(1,50,000 – 1,20,000 units) * ¥ (30 - 20)} * *9.80) Add: Inland taxes on Local Sale - Chinese Manufacturer [{(1,20,000 units ~ ¥30) > 10%} * *9.80] Total Loss Before Corporate Taxes Less: Tax Savings on the Losses (264,68,000 * 25%) Net Loss after Corporate taxes On SCI Group 64,68,000 16,17,000 48,51,000 Amount (3) Particulars 60,12,270 Saving from Indian Subsidiary 48,51,000 Loss from Chinese Subsidiary 11,61,270 Net Benefit to SCI Group From the above analysis, it can be seen that the proposal from the Japanese manufacturer in India is beneficial for the SCI as it give a net benefit of 11,61,270. (ii) The SCI need to consider various other issues before reaching at a final decision of accepting the proposal of the Japanese manufacturer in India. The few suggestive issues that should be considered are as follows: The longevity of the proposal of the Japanese manufacturer: Whether Japanese manufacturer will supply the components in the future also. For this purpose, a long term agreement between the Indian Subsidiary of SCI and Japanese manufacturer in India needs to be entered. Certainty of the fiscal policy in India: The Japanese manufacturer will not be able to supply the component at the present price if the fiscal policy of India will change in the future. Repatriation of Profit earned in India: Though the Indian subsidiary is making profit but it depends on the Government policy on the repatriation of profit from India to USA. Operating Conditions in China: The SCi has to make sure that the Chinese subsidiary is operating profitably and able to use the spare capacity in the future as well. China in future then the manufacturing cost will be cheaper than the today's cost. accords should also be kept in consideration. Scanned with CamScanner

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