Multinational transfer pricing, global tax minimization. Industrial Diamonds, Inc., based in Vancouver, has two divisions:

a. Philippine Mining Division. Operates a mine in the Philippines containing a rich body of raw diamonds.

b. Canadian Processing Division. Processes the raw diamonds into polished diamonds used in industrial applications.

The costs ofthe Philippine Mining Division are Variable costs, 3,000 pesos per ldlogram of raw industrial diamonds Fixed costs, 6,000 pesos per kilogram of raw industrial diamonds Industrial Diamonds has a corporate policy of further processing diamonds in Vancouver. $everal diamond-polishing companies in the Philippines buy raw diamonds from other local mining companies at 12,000 pesos per kilogram. Assume that the current foreign exchange rate is 25 pesos = $1 Cdn.

The costs ofthe Canadian Processing Division are:

Variable costs, $240 per kilogram of polished industrial diamonds Fixed costs, $720 per kilogram of polished industrial diamonds Assume that it takes two kilograms of raw industrial diamonds to yield one kilogram of polished industrial diamonds. Polished diamonds sell for $4,800 per kilogram.

Required 1. Compute the transfer price (in $Cdn) for one kilogram of raw industrial diamonds transferred from the Philippine Mining Division to the Canadian Processing Division under two methods:

(a) 300% offull costs and

(b) market price.
2. Assume a world of no income taxes. One thousand kilograms of raw industrial diamonds are mined by the Philippine Division and then processed and sold by the Canadian Processing Division. Compute the operating income (in $Cdn) for each division of Industrial Diamonds, Inc., under each transfer-pricing method in requirement 1.
3. Assume that the corporate income tax rate is 20% in the Philippines and 35% in Canada.
Compute the after-tax operating income (in $Cdn) for each division under each transfer pricing method in requirement 1. (Income taxes are not included in the computation of die cost-based transfer price. Industrial Diamonds does not pay Canadian taxes on income already taxed in the Philippines.)
4. Which transfer-pricing method in requirement 1 will maximize the total after-tax operat¬
ing income ofIndustrial Diamonds?
What factors, in addition to global tax minimization, might Industrial Diamonds consider in choosing a transfer-pricing method for transfers between its two divisions?