Question

Subsidiary X, located in a country with a 25% corporate income tax rate, and Subsidiary Y, located in a country with a 35% corporate income tax rate are part of a decentralized organization. They have been engaged in trade with one another using a negotiated transfer price of $50 per unit for sales by Subsidiary X to Subsidiary Y. Pipko, the parent company of both Subsidiary X and Subsidiary Y recently set a discretionary transfer price of $80 per unit for the transfers between X and Y. What is advantage of this decision

Answer 1

Answer:

The advantage of this decision is $3 per unit.

Explanation:

The Net benefit is the tax saving on the transfer pricing.

First, we need to calculate the tax-saving rate

Tax saving rate = Tax on Subsidiary Y - Tax on Subsidiary X = 35% - 25% = 10%

Now calculate the excess discretionary transfer price

Excess discretionary transfer price = $80 - $50 = $30

Net benefit = Excess discretionary transfer price x Tax saving rate = $30 x 10% = $3 per unit