a. A US corporation has an account payable to an unrelated Irish company in 90 days. The amount of the payable is €500,000. The spot exchange rate for the euro is EUR/USD 1.2131. The company’s combined federal and state income tax rate is 27.3%; the Irish corporate income tax rate is 12.5%. The company expects the exchange rate for the euro to decline to 1.2030 prior to the account’s due date. When should the company make the payment? Explain.
b. If the payee on the account is an affiliated corporation, when should the company make the payment? Explain.
c. What is the payment described in part b called? How can the company justify the amount of the payment if it is challenged by the US Internal Revenue Service or Ireland’s Revenue authority?