A multinational company has a subsidiary in country A that produces auto parts and sells them to another subsidiary in country B, where the production process is completed.

Country A has a tax rate of 50 percent, while country B has a tax rate of 20 percent. The income statements of these two subsidiaries are shown in the following table:

Assume that the multinational company reduces its transfer price from \($4,000\) to \($3,200.
Determine\) the tax effect of this low transfer price on the company’s consolidated net income.

Transcribed Image Text:

Pro forma Income statements for two subsidiaries High tax A Low tax B Combined A+B High transfer price Sales price $4,000 $7,000 $7,000 Cost of goods sold 2,200 4,000 2,200 Gross profit $1,800 $3,000 $4,800 Operating expense 800 1,000 1,800 Earnings before taxes $1,000 $2,000 $3,000 Taxes (50%/20%) 500 400 900 Net Income $ 500 $1,600 $2,100