International Taxation Question

PROBLEM 1

A foreign corporation can structure its U.S. operations as either a branch or a subsidiary. What are the tax advantages of operating in the United States through a separately incorporated subsidiary? What are the tax advantages of operating in the United States through an unincorporated branch? What general business factors should be considered when choosing between the branch and subsidiary forms of doing business in the United States?

PROBLEM 2

In each of the following independent situations involving transfers of tangible property, determine which transfer pricing method applies and compute a transfer price using the appropriate method. Show all of your computations.

a.Dougco, a domestic corporation, owns 100% of Fco, a foreign corporation. Dougco manufactures top-of-the-line office chairs at a cost of $300 per unit and sells them to Fco, which resells the goods (without any further processing) to unrelated foreign customers for $450 each. Independent foreign distributors typically earn commissions of 20% (expressed as a percentage of the sales price) on the purchase and resale of products comparable to those produced by Dougco.

b.Clairco, a domestic corporation, owns 100% of Fco, a foreign corporation that manufactures women's running shoes at a cost of $30 each and sells them to Clairco. Clairco attaches its trade name to the shoes (which has a significant effect on their resale price), and resells them to unrelated customers in the United States for $80 each. Independent foreign manufacturers producing similar running shoes typically earn a gross profit mark-up (expressed as a percentage of the manufacturing costs) of 15%.

c.Tomco, a domestic corporation, owns 100% of Fco, a foreign corporation. Tomco manufactures riding lawn mowers at a cost of $2,500 per unit, and sells them to unrelated foreign distributors at a price of $3,750 per unit. Tomco also sells the mowers to Fco, which then resells the goods to unrelated foreign customers for $4,250 each. The conditions of Tomco's sales to Fco are essentially equivalent to those of the sales made to unrelated foreign distributors.