Problem:
AGC 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 AGC has no excess tax credits elsewhere.
Q1. Should AGC use the high transfer price or the low transfer price for goods shipped from Chile or Brazil?
Q2. Suppose Brazil introduces an import tariff of 20 percent. With the import tariff, should AGC use the high transfer price or the low transfer price for goods shipped from Chile to Brazil?