Problem
BHP is an Australian mining company that extracts iron ore from mines in Australia and sells the iron ore to China. BHP's market price per ton of iron ore for export to China is AUD 1500, and the production cost per ton of iron ore exported to China is AUD 1000. (AUD is Australian dollars). Assume the corporate tax rate in Australia is 50%, and in China the tax rate is 25%.
A. To maximize BHP's worldwide profits, what should be BHP's transfer price per ton of iron ore for exporting from Australia to its China subsidiary. What will be the before-tax and after-tax profit per ton of iron ore for BHP in Australia, BHP in China, and BHP worldwide in this scenario? What will be the tax revenue for governments in Australia and China in this scenario
B. What is the implication for the Australian government when MNCs such as BHP maximize their profits through transfer pricing schemes? What should the Australian government do to stop this practice and maximize tax revenue in Australia?