Problem
Lumber Inc., a U.S. based company, manufactures wooden tables at its subsidiary in Brazil (Tables du Brazil). The tables cost $150 per table. The tables produced by Tables du Brazil are sold in the U.S. by Lumber to Customer Inc. (a Lumber Inc. wholly-owned subsidiary) and by Tables and Chairs Inc. (an unaffiliated customer). Lumber to Customer Inc. and Tables du Brazil are considered related parties under Section 482 of the U.S. Internal Revenue Code.
Tables du Brazil pays the $15 cost of shipping the tables to the U.S. Other Brazilian manufacturers sell their wooden tables in the U.S. at a markup of 40%. Tables du Brazil sells their table to Tables and Chairs Inc. for $320. Lumber to Customer and Tables and Chairs Inc. pay U.S. import duties of 2%. Tables and Chairs Inc. marks up the total cost of the tables by 50% and sells it for $389.60, per table. Lumber to Customer sells the tables to retailers for $359 per table.
Assume the following tax rates:
Brazilian corporate income tax rate 19%
Brazilian withholding tax rate on dividends 19%
U.S. corporate income tax rate 21%
U.S. import duty 2%
Task
Determine possible transfer prices for Tables du Brazil to sell their tables to Lumber to Customer Inc. under three different methods:
• The cost-plus method,
• The resale price method
• The comparable uncontrolled price method.
• The transfer prices must be justifiable to both U.S. and Brazilian tax authorities.