The following information is available for Company ABC.
(All amounts provided are in US dollars)
$\begin{array}{lll}
&\text { Manufacturing Affiliate } & \text { Sales Affiliate } \
&\text { (Canada, income tax rate: } & \text { (United States, income } \
&40 \% \text { ) } & \text { tax rate: } 30 \% \text { ) }\
\text { Sales } & \_\_\_& \$ 10,000 \
\text { Cost of goods sold } & 5,000 &\_\_\_ \
\text { Operating expenses } & 1,000 & \$ 1,000\ \text { Taxable income}\ \text { Income taxes}\ \text {Net income }\
\end{array}$
-Assume that the US and Canadian governments impose no restrictions on transfer pricing.What transfer price should Company ABC charge?

Question

Quizplus · Accepted Answer

To maximize overall profit and minimize taxes, the transfer price should be set at a level that shifts profit from the high-tax jurisdiction (Canada, 40%) to the low-tax jurisdiction (United States, 30%). By setting the transfer price at $6,000, the manufacturing affiliate in Canada shows a lower profit (and thus pays less tax), while the sales affiliate in the US shows a higher cost of goods sold (reducing its taxable income but benefiting from the lower tax rate). This strategy leverages the difference in tax rates to reduce the overall tax burden on the company.

The Following Information Is Available for Company ABC -Assume That the US and Canadian Governments Impose No Restrictions