Alubar, a U.S. multinational, receives royalties from Country A, foreign-branch earnings from Country B, and dividends equal to 50 percent of net income from subsidiaries in Countries C and D. There is a 10 percent withholding tax on the royalty from Country A and a 10 percent withholding tax on the dividend from Country C. Income tax rates are 20 percent in Country B and 40 percent in Country C. Country D assesses indirect taxes of 40 percent instead of direct taxes on income. Selected data are as follows: unit, and a reasonable profit margin on such cross-border sales is 20 percent of cost. Now suppose that Country B levies a corporate income tax of 40 percent on taxable income (vs. 30 percent in Country A) and a tariff of 20 percent on the declared value of the imported goods. The minimum declared value legally allowed in Country B is $100 per unit with no upper limit. Import duties are deductible for income tax purposes in Country B.
Required: a. Based on the foregoing information, formulate
a transfer pricing strategy that would minimize Global Enterprise’s overall tax burden.
b. What issues does your pricing decision raise?