Transfer Pricing; Ethics Target 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 $200,000. The unit in country X has manufacturing costs of $100,000 for these products. The retail unit in country Y sells the product to final customers for $300,000. Target 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 Target. What would be the effect on Target’s total tax burden if the manufacturing unit raises its price from $200,000 to $240,000?
2. What would be the effect on Target’s total taxes if the manufacturing unit raised its price from $200,000 to $240,000 and the tax rates in country X and country Y are 20% and 40%, respectively?
3. Comment on any ethical issues you observe in this case.
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