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Zeus TeleManufacturing Company is an Italian company with three subsidiaries located in Austria, the United States (U.S.) and Brazil. The Austrian plant manufactures a finished

Zeus TeleManufacturing Company is an Italian company with three subsidiaries located in Austria, the United States (U.S.) and Brazil. The Austrian plant manufactures a finished product and exports it to the U.S. and Brazilian subsidiaries.

Income tax rates

Austria

44%

U.S.

35%

Brazil

30%

Import duty

into the U.S.

10%

on the transfer price

into Brazil

18%

on the transfer price

Costs for the component

Variable costs

$30

Fixed costs

$14

Shipping cost

$5

Selling price for the component

in the U.S.

$70

in Brazil

$65

The Austrian company has excess capacity to produce 10,000 units annually. Shipping cost is paid by the buying subsidiary.

Required:

(a) Assume the component is very popular and both the U.S. and Brazilian subsidiaries can sell 10,000 units. How many units should be sold to the U.S. subsidiary and how many to the Brazilian subsidiary? At what transfer price? Briefly explain the choices.

(b) What factors, in addition to global tax minimisation, should multinational companies consider in choosing a transfer pricing method?

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