Raval Company, based in Sydney, Australia, has a wholly-owned subsidiary in Singapore. The Singaporean subsidiary manufactures bicycles at a cost equal to A$20 per bicycle, which it sells to Raval at an FOB shipping point price of A$100 each. Raval pays shipping costs of A$10 per bicycle and an import duty of 10 percent on the A$100 invoice price. Raval sells the bicycles in Australia for A$200 each. The Australian tax authority discovers that Raval’s Singaporean subsidiary also sells its bicycles to uncontrolled Australian customers at a price of A$80 each. Accordingly, the Australian tax authority makes a transfer pricing adjustment to Raval’s tax return, which decreases Raval’s cost of goods sold by A$20 per bicycle. An offsetting adjustment (refund) is made for the import duty previously paid. The effective income tax rate in Singapore is 17 percent, and Raval’s effective income tax rate in Australia is 30 percent. 

Required: 

a. Determine the total amount of income taxes and import duty paid on each bicycle (in Australian dollars) under each of the following situations: 

1. Before the Australian tax authority makes a transfer pricing adjustment. 

2. After the Australian tax authority makes a transfer pricing adjustment (assume the tax authority in Singapore provides a correlative adjustment). 

3. After the Australian tax authority makes a transfer pricing adjustment (assume the tax authority in Singapore does not provide a correlative adjustment). 

b. Discuss Raval Company management’s decision to allow its Singaporean subsidiary to charge a higher price to Raval than to uncontrolled customers in Australia. 

c. Assess the likelihood that the Singaporean tax authority will provide a correlative adjustment to Raval Company.