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Transfer Pricing Coffee Makers International

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However, the tax aspect only applies to MNEs with divisions in different tax jurisdictions. Where a supplying division exists in a high tax jurisdiction, MNEs tend to add a low market when supplies are being exported to a division in a low tax jurisdiction in order to reduce the tax. However, based on OECD guidelines, the arms length principle applies, and so the tax authorities would make the necessary adjustments as they see fit. Table 1 indicates that Division A’s profit would increase by $100,000 if the proposal is accepted. However, the proposal will have a negative impact on Division C’s business and the company’s as a whole as shown in Tables 3 and 4.The information in Table 2 indicates that Division B’s profit will increase by $50,000 if the proposal is accepted. The information in Table 3 below shows the impact that the proposal would have on Division C from which Division A and B purchases some of their supplies – Part 101 and Part 202 respectively. The information in Table 3 indicates that Division C’s profit would decrease by $2mn if the proposal is accepted. This is a very big reduction in profit for Division C and could effectively place the division in a loss position as well as have a negative impact on the company as a whole. …
is a very big reduction in profit for Division C and could effectively place the division in a loss position as well as have a negative impact on the company as a whole. In fact, the increase in profits for Division A and B cannot compensate for the loss of income to Division C. The impact of this proposal on the company as a whole is shown in Table 4. Effects of Proposal on the Company as a Whole Increase in Profit from Division A 100,000 Increase in Profit from Division B 50,000 Decrease in Profit from Division C (2,000,000) Reduction in profit for the Company (1,850,000) Table 4 – Change in profit on the company as a whole if the proposal is accepted The information in Table 4 consists of information taken form Tables 1, 2 and 3. This is an indication that whatever affects the individual parts will have an impact on the company as a whole. The information indicates that when taken together, the net impact on the company as a whole would be negative (- $1.85mn). This is a very large reduction in profit, and so this proposal should not be accepted as it will not be beneficial to the company. While the price charged may have a positive impact on the profitability of Divisions A and B, the ultimate effect will be on the company as a whole, and so it does not matter whether Division C charges $1,000 or $900 to Part 101 or $2,000 or $1,900 for Part 201. However, the market price is $900 and $1,900 respectively, and so it would make sense if Division C transfers the parts to Divisions A and B at the current market price. The quest for internal recognition should not be allowed to derail the company’s goal of profitability. In fact, Keat and Young (2006) indicate that if each profit center or division sets its price in the interest of maximizing its own profit, then the