In each of the following independent situations involving transfers of tangible property, determine which transfer pricing methods applies and compute a transfer price using the appropriate method. Show all of your computations.
a) Dougco, a domestic corporation, owns 100% of Thaico, a Thailand corporation. Dougco manufactures top-of-the-line office chairs at a cost of $300 per unit and sells them to Thaico, which resells the goods (without any further processing) to unrelated foreign customers for $450 each. Independent foreign distributors typically earn commissions of 20% (expressed as a percentage of the sales price) on the purchase and resale of products comparable to those produced by Dougco.
b) Clairco, a domestic corporation, owns 100% of Shuco, a foreign corporation that manufactures women's running shoes at a cost of $30 each and sells them to Clairco. Clairco attaches its trade name to the shoes (which has a significant effect on their resale price), and resells them to unrelated customers in the United States for $80 each. Independent foreign manufacturers producing similar running shoes typically earn a gross profit mark-up (expressed as a percentage of the manufacturing costs) of 15%.
c) Tomco, a domestic corporation, owns 100% of Swissco, a Swiss corporation. Tomco manufactures riding lawn mowers at a cost of $2,500 per unit, and sells them to unrelated foreign distributors at a price of $3,750 per unit. Tomco also sells the equipment to Swissco, which then resells the goods to unrelated foreign customers for $4,250 each. The conditions of Tomco's sales to Swissco are essentially equivalent to those of the sales made to unrelated foreign distributors.
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Taxation of international transactions are discussed. The pricing methods which applies and computes transfer prices using the appropriate methods are determined.
U.S. Taxation of International Transactions
Can you help me with the following scenarios below concerning U.S. taxation on international transactions?
Scenario 1: USAco, a domestic corporation, forms a Canadian subsidiary, CANco, to distribute USAco's widgets in Canada. USAco sells widgets to CANco for resale in Canada, providing CANco with USAco's unique distribution software. This provides the use of USAco's collections staff to collect receivables from delinquent accounts.
What are the intercompany transactions that USAco must price at arm's length?
What compliance techniques may USAco employ to minimize the risk of a transfer pricing penalty?
Scenario 2: Erica is a citizen of a foreign country, and is employed by a foreign-based computer manufacturer. Erica's job is to provide technical assistance to customers who purchase the company's mainframe computers. Many of Erica's customers are located in the United States. As a consequence, Erica consistently spends about 100 working days per year in the United States. In addition, Erica spends about 20 vacation days per year in Las Vegas, since she loves to gamble and also enjoys the desert climate. Erica does not possess a green card. Assume that the United States has entered into an income tax treaty with Erica's home country that is identical to the United States Model Income Tax Convention of November 15, 2006.
How does the United States tax Erica's activities?
How would your answer change if Erica were a self-employed technician rather than an employee?