A U.S. company has a subsidiary in Italy and a subsidiary in Ireland. The Italian subsidiary produces a product at a cost of $1,000 per unit. This unit is then shipped to the Irish subsidiary, which performs additional processing at a cost of $100 per unit. The unit is then shipped to the U.S. parent company, which performs additional processing at a cost of $100 per unit. The unit is then sold to a U.S. customer for $2,000. The tax rate in Italy is 30%, the tax rate in Ireland is 15%, and the tax rate in the United States is 35%.

Answer the following questions: 1. Assume the transfer price associated with the sale to the Irish subsidiary is $1,200 and that the transfer price for the sale to the U.S. parent company is $1,600. Under this situation, what is the income tax paid by each of the following: (a) the Italian subsidiary, (b) the Irish subsidiary and (c) the U.S. parent company.

2. Assume now that the transfer price associated with the sale to the Irish subsidiary is $1,100 and that the transfer price for the sale to the U.S. parent company is $1,800. Under this situation, what is the income tax paid by each of the following: (a) the Italian subsidiary, (b) the Irish subsidiary and (c) the U.S. parent company.

3. Which of these two transfer pricing scenarios are in the best interest of the company? Show calculations to support your answer.