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Cotton Comfort Corporation is a U.S. shirt manufacturer with a foreign subsidiary in Country X. Cloth to make shirts is woven in the United States,

Cotton Comfort Corporation is a U.S. shirt manufacturer with a foreign subsidiary in Country X. Cloth to make shirts is woven in the United States, at a cost of $16.00 per shirt, and shipped to Country X where it is cut and sewn at a cost of $19.80 per shirt. These shirts are sold in Europe for $82 per shirt. The profit on each shirt is $46.20, a portion of which is U.S. source income and a portion of which is foreign source income, depending on the price at which the cloth is transferred from the United States to Country X.

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  1. If the tax rate in Country X is lower than the U.S. tax rate, would Cotton Comfort prefer a high transfer price or a low transfer price? At what transfer price would all of the profit on these shirts be tax in Country X?
  2. If the tax rate in Country X is higher than the U.S. tax rate, would Cotton Comfort prefer a high transfer price or a low transfer price? At what transfer price would all of the profit on these shirts be tax in the United States?

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