Defining cost terms. You are the controller of the Heinz potato processing subsidiary in Ireland. This subsidiary processes potatoes for frozen dinners, fast food restaurants, and other large institutional buyers. Assume that companies setting up manufacturing facilities in Ireland receive an income tax rebate equivalent to the ratio of employment costs of Irish citizens to total manufacturing costs in Ireland. Thus, if the Irish subsidiary has a “pre-rebate” tax bill of

$12 million and the ratio of employment costs to total manufacturing costs is 22%, its actual tax bill will be reduced by $2.64 million to $9.36 million.

INSTRUCTIONS Form groups of two or more students to complete the following requirement.

REQUIRED Develop guidelines as to how Heinz should define costs at its Irish subsidiary. Assume one aim is to minimize the income taxes that Heinz is legitimately required to pay to the Irish government.

LO1