Affiliate A sells a million units to Affiliate B per year. The marginal income tax rate for Affiliate A is 20 percent and the marginal income tax rate for Affiliate B is 50 percent. The transfer price can be set at any level between $100 and $200. Which transfer price between A and B should the parent select?

Question

Quizplus · Accepted Answer

Setting the transfer price at $200 maximizes the taxable income for Affiliate A, which is taxed at a lower rate (20%), and minimizes the taxable income for Affiliate B, which is taxed at a higher rate (50%), thus minimizing the overall tax burden for the parent company.

Affiliate a Sells a Million Units to Affiliate B Per