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International Finance - Etemadi and Co.

Etemadi and Co., a U.S. firm with subsidiaries in Chile and Brazil, can justify a transfer price anywhere between $600 and $800 per unit for cookware sets shipped from Chile to Brazil while simultaneously preserving positive profits in both locations. The corporate income tax rate in Chile is 30 percent and the corporate income tax rate in Brazil is 40 percent. There is no repatriation of profits currently planned, and Etemadi has no excess tax credits elsewhere.

a. Should Etemadi use the high transfer price or the low transfer price for goods shipped from Chile or Brazil?

b. Suppose Brazil introduces an import tariff of 20 percent. With the import tariff, should Etemadi use the high transfer price or the low transfer price for goods shipped from Chile to Brazil?

Solution Preview

a. Should Etemadi use the high transfer price or the low transfer price for goods shipped from Chile or Brazil?
If goods are shipped from Chile to Brazil
It can have higher transfer price as the income tax rate in Chile is lower than the Brazil. Thus it can set the price at $800.

If goods are shipped from Brazil to Chile
It can ...

Solution Summary

This solution determines if Etemadi should use high transfer prices or low transfer price for goods shipped from Chile or Brazil, it also looks at the effects of Brazil introducing an import tariff percent. All explanations are included with brief calculations.

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