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    Financing foreign operations - tax considerations

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    Suppose Navistar's Canadian subsidiary sells 1,500 trucks monthly to the French affiliate at a transfer price of $27,000 per unit. Assume that the Canadian and French marginal tax rates on corporate income equal 45 percent and 50 percent, respectively.

    a. Suppose the transfer price can be set at any level between $25,000 and $30,000. At what transfer price will corporate taxes paid be minimized? Explain.

    b. Suppose the French government imposes an ad valorem tariff of 15 percent on imported tractors. How would this tariff affect the optimal transfer pricing strategy?

    c. If the transfer price of $27,000 is set in euros and the euro revalues by 5 percent, what will happen to the firm's overall tax bill? Consider the tax consequences both with and without the 15 percent tariff.

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    Solution Preview

    a. Suppose the transfer price can be set at any level between $25,000 and $30,000. At what transfer price will corporate taxes paid be minimized? Explain.
    Please note that we assume that the trucks are sold at a profit in France. If this be so then if the trucks are transferred at $30,000, then on the $5,000 that lies between $25,000 and $30,000, the tax paid is @45% that is 2250 but if the trucks are transferred at $25,000, the tax paid on the 5,000 is @50% that is 2500. So, the trucks should be transferred at $30,000
    b. Suppose the French ...

    $2.19

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