Question: Chinglish Dirk Company (Hong Kong) exports razor blades to its wholly owned parent company, Torrington Edge (Great Britain). Hong Kong tax rates are 16% and British tax rates are 30%. Chinglish calculates its profit per container as follows (all values in British pounds).
Chinglish Dirk (C). Not to leave any potential tax repositioning opportunities unexplored, Torrington Edge wants to combine the components of Problem with a redistribution of overhead costs. If overhead costs could be reallocated between the two units, but still total £5,000 per unit and maintain a minimum of £1,750 per unit in Hong Kong, what is the impact of this repositioning on consolidated profits after-tax and total tax payments?
Problem: Chinglish Dirk Company (Hong Kong) exports razor blades to its wholly owned parent company, Torrington Edge (Great Britain). Hong Kong tax rates are 16% and British tax rates are 30%. Chinglish calculates its profit per container as follows (all values in British pounds).
Chinglish Dirk (B). Encouraged by the results from the previous problem's analysis, corporate management of Torrington Edge wishes to continue to reposition profit in Hong Kong. It is, however, facing two constraints. First, the final sales price in Great Britain must be £20,000 or less to remain competitive. Secondly, the British tax authorities-in working with Torrington Edge's cost accounting staff-has established a maximum transfer price allowed (from Hong Kong) of £17,800. What combination of markups do you recommend for Torrington Edge to institute? What is the impact of this repositioning on consolidated profits on after-tax and total tax payments?