Part 1 Tax arbitrage

Products, Inc., Singapore (PI Asia) and Products, Inc. US (PI North America) are part of an affiliated group of companies, all of which have common ownership. These affiliates do business in Singapore and the US, respectively, and have regular transactions with each other. On such transaction involves assemblies that PI Asia produces and sells to PI North America. PI Asia purchases materials and labor from unrelated third parties for S$1000, incurs additional expenses of S$1000 and sells the partially completed assemblies that it produces to PI North America. PI North America incurs additional expenses of $500 to finish production and sells the completed product to unrelated customers for $2500.

The average exchange rate is USDSGD 1.2500. Assume the corporate income tax rate in Singapore is 17%, and in the US, 25% (combined state and federal).

Transfer pricing

1a. What price should PI Asia charge to minimize the total tax liability for the affiliated group of companies?

b. What is the general rule about the transfer price that minimizing taxes when a company from a low tax jurisdiction sells a product to a related company in a high tax jurisdiction?