Question

Payment timing

Assume that PI Asia and PI North America agree with the taxing authorities in Singapore and the US that PI Asia will sell the partially completed assemblies to PI North America for S$2350. PI Asia submits invoices to PI North America on a monthly basis but allows PI North America to make payment within 30 days.

3a. At the time the monthly invoice is submitted, the exchange rate is USDSGD 1.2250. The company expects the exchange rate to decrease to USDSGD 1.2500 next week. When should PI North America pay the invoice if it is trying to minimize the affiliated group’s overall tax?

b. When should PI North America make the payment if the exchange rate is currently USDSGD 1.2700 when the invoice is submitted but it is expected to be USDSGD 1.2500 next week?

c. What is the general rule about the timing of the payment when a company from a low tax jurisdiction sells a product to a company in a high tax jurisdiction but the date of payment is selected based on the exchange rate on that day? (It will be either: “the company should pay when the currency is relatively more expensive” or “the company should pay when the currency that is relatively less expensive”.) Explain.

4. Answer questions 3a through 3b assuming the price is set in US dollars, at $1880.

5. Using the total taxes payable on 3a, 3b, 4a and 4b, which currency should the price be set in (the high tax country currency or the low tax country currency) to take advantage of payment timing?

Answer 1

Ans 3a) PI North America should pay the invoice when exchange rate of USDSGD 1.25 next week, because in that way PI North America has to pay less. Difference = (2350/1.225 - 2350/1.25) (they have to pay 38.36735 dollar less)

Ans 3b) In this case since exchange rate will increase then it will be beneficial if invoice is submitted now rather than next week.

Ans 4) If price will be set in US dollars then answer will be opposite for both the cases in case a PI North America should submit its invoice now and in case b it should submit invoice next week o take teh advantage of exchange rate.

Ans 5) SGD should the price be set in to take advantage of payment timing.