Transfer Pricing—International Example A subsidiary company located in country A purchases $100 worth of goods. It then repackages, exports, and sells those goods to the parent company, located in...

Transfer Pricing—International Example A subsidiary company located in country A purchases $100 worth of goods. It then repackages, exports, and sells those goods to the parent company, located in country B, for $200. The parent company sells the goods for $300. Therefore, both entities have a $100 profit. Assume that the income tax rate in country A is 20%, while the tax rate in country B is 60%.

Required 1. Given the above facts and assumptions, what is the company’s combined (i.e., worldwide) after-tax income for this transaction? (Show calculations.) 2. Consider now a transfer pricing approach in which the subsidiary sells the goods to the parent company for $280 and the parent company then sells the goods for $300. What is the revised worldwide (i.e., combined) after-tax profit for this transaction? (Show calculations.) 3. What is the effect of the transfer pricing decision when the income tax rates for the two countries in question are equal? 4. What limitations exist regarding the setting of transfer prices for multinational transfers?