Question

Trans Atlantic Metals has two operating divisions. Its forging operation in Finland forges raw metal, cuts it, and then ships it to the United States where the company’s Gear Division uses the metal to produce finished gears. Operating expenses amount to $20.8 million in Finland and $60.8 million in the United States exclusive of the costs of any goods transferred from Finland. Revenues in the United States are $158 million.

   

If the metal were purchased from one of the company’s U.S. forging divisions, the costs would be $30.8 million. However, if it had been purchased from an independent Finnish supplier, the cost would be $40.8 million. The marginal income tax rate is 70 percent in Finland and 30 percent in the United States.

Required:

What is the company’s total tax liability to both jurisdictions for each of the two alternative transfer pricing scenarios ($30.8 million and $40.8 million)?

Answer 1

If transfer price is 30.8 million, the tax liability will be 26920000.

	FINLAND	US
Sales revenue	30800000	158000000
Third party cost	20800000	60800000
Transfer cost		30800000
Total cost	20800000	91600000
Taxable income	10000000	66400000
Tax rate	70%	30%
Tax liability	7000000	19920000
Total tax liability		26920000

If transfer price is 40.8 million, the tax liability will be 30920000.

	FINLAND	US
Sales revenue	40800000	158000000
Third party cost	20800000	60800000
Transfer cost		40800000
Total cost		101600000
Taxable income	20000000	56400000
Tax rate	70%	30%
Tax liability	14000000	16920000
Total tax liability		30920000