Finding the transfer price in different situations.
Harpoon, Inc., is a U.S. multinational corporation that ships small appliances to its subsidiary in Austria. The marginal profits tax rate in the United States is 34 percent, and the marginal profits tax rate in Austria is 55 percent. The U.S. taxes foreign subsidiary income only when repatriated, and allows a credit for foreign taxes paid. Austria has a 20 percent 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. What should the transfer price be?
b. If Austria introduces an import tariff of 25 percent 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 the import tariff introduced in question b.)
d. If $100 in pretax profits is repatriated from Austria, what is Harpoon?s additional tax burden or excess tax credit in the United States? (Again, ignore the import tariff introduced in question b)