A subsidiary SS in CLand sells lumber to Parents PP in BLand. The market price of lumber is B$100/m3. The full cost of lumber of SS is B$60/m3. Parents allow the normal markup of 20% for subsidiaries. Corporate income tax (CIT) is 30% and 20% in CLand and BLand, respectively.
Required:
• If Parents want to control for tax minimization, what is the transfer price? The market price or the 20% cost plus price?
• Is there any macro impact to CLand? What should authorities of CLand do to control such transfer pricing implications?