Q: In 2000 San Fernando shipped 300 diamond drill bits to its subsidiary in Ecuador. The drill bits were shipped at San Fernando's cost of $1 million each to keep away from Ecuador's duty of 20%. In 2000 Ecuador's income tax on foreign subsidiaries was 35% and the U.S. corporate tax rate was 35%. In 2001 Ecuador proposes to raise the corporate tax rate to 45%, eradicate duties, and impose a 10% VAT. The U.S. rate will remain the same.
1. What action could San Fernando take on its export pricing?
2. What probable U.S. government action may result from your decision in 1?