Question: Harpoon, is a United State multinational corporation that ships small appliances to its subsidiary in Austria. The marginal profits tax rate in the U.S. is 34%, and the marginal profits tax rate in Austria is 55%. The UNITED STATE taxes foreign subsidiary income only when repatriated, & permit a credit for foreign taxes paid. Austria has a 20% withholding tax on dividend payments, for which the United States gives a complete tax credit. Harpoon’s accountant has just informed you that she can justify setting a transfer price anywhere between $100 and $150 on microwave ovens shipped to Austria.
[A] Determine the transfer price?
[B] If Austria introduces an import tariff of 25% on microwave ovens, and permits this to be a deductible expense in figuring the subsidiary’s income tax, what should the transfer price be?
[C] If $100 in pretax profits is repatriated from Austria, how much cash does the parent receive? [Ignore import tariff introduced in question B.]
[D] If $100 in pretax profits is repatriated from Austria, calculate Harpoon’s additional tax burden or excess tax credit in the United States? [Ignore import tariff introduced in question B]