The international tax accountants at Doeren Mayhew and our international affiliate, Moore Stephens Doeren Mayhew, offer the following example to illustrate how transfer pricing can be incorporated into your international tax planning strategy (subject to transfer pricing rules).
Subco is located in Lowland, which has a 10 percent corporate income tax. Parentco is located in Highland, which has a 40 percent tax. In Scenario 1, Subco manufactures component parts at a cost of $1 million and sells them to Parentco for $2 million. Parentco assembles the parts into finished products, packages them and sells them for $3 million. In Scenario 2, Subco sells the parts to Parentco for $2.75 million.
As the charts below indicate, the transfer pricing strategy in Scenario 2 reduces the company’s overall tax liability from $500,000 to only $275,000.
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