Transfer Pricing to Brazil The Amplifier Division of Cadillac Electronics, Inc., a diversified international company headquartered in New York, sells amplifier kits in the United States and several foreign countries. The selling price for these kits is $40 in the United States, where the income tax rate is 50 percent.

The Brazilian market is one of the foreign markets in which the Amplifier Division is active. Cadillac Electronics has a 60-percent-owned subsidiary in Brazil, which buys the amplifier kits from the Amplifier Division and sells them to local wholesalers.

The total cost of the kits delivered to the Brazilian port is $30, of which $2 is transportation cost. Brazilian tariffs on amplifiers are 40 percent on declared value. These duties are paid by the Brazilian subsidiary and become part of its cost of inventory. There is a minimum declared value legally allowed of $30 but no upper limit. The applicable income tax rate in Brazil is 35. percent. There are no other restrictions or taxes affecting the transfer of funds from Brazil to the United States.
. In the past, Cadillac Electronics has transferred the kits to the Brazilian subsidiary at a declared price equal to the United States market jOOGS, 2, $40. Ignoring performance measurement and motivational issues, do you find the $40 declared value a sound economic decision? If not, what declared value would you select? Explain . Does the transfer price you recommend suit the need for good relations with the minority shareholders of the Brazilian subsidiary? Why? lop1