Zen Manufacturing, Inc., is a multinational firm with sales and manfacturing centers in 15 countries. One of its manufacturing units, in country X, sells its product to a retail unit in country Y for $300,000. The unit in country X has manufacturing costs of $150,000 for these products. The retail unit in country Y sells the product to final customers for $450,000. Zen is considering adjusting its transfer prices to reduce overall corporate tax liability.

 

Problem Information
$300,000	Selling price/unit, made in country X and sold in country Y
$150,000	Manufacturing cost/unit, country X
$450,000	Ultimate selling price/unit, country Y
$360,000	Revised (new) selling price/unit, from country X to country Y
20%	Part II: Tax rate assumed, country X
40%	Part II: Tax rate assumed, country Y

Requirements

1. Assume that both country X and country Y have corporate income tax rate of 40 percent and that no special tax treaties or benefits apply to Zen. What would be the effect on Zen's total tax burden if the manufacturing unit raises its price from $300,000 to $360,000?

2. What would be the effect on Zen's total taxes if the manufacturing unit raised its price from $300,000 to $360,000 and the tax rate in country X is 20 percent and in country Y is 40 percent?

3. Comment on the ethical issues you observe, if any, in this case.