Saint Leo Corporation (a U.S.-based company) has a wholly-owned subsidiary inVietnam that manufactures insulated wire at a cost of $3 per meter. Saint Leo
Corporation imports the insulated wire and sells it to U.S. retailers at a price of $12
per meter. The following information applies:
Income tax rate
United States
21%
Import duty rate
20%
Withholding tax rate on dividends
———-
Vietnam
12%
—–6%
Import duties are levied on the invoice price and are deductible for income tax
purposes. The Vietnam subsidiary must repatriate 100 percent of after-tax
income to Saint Leo Corp. each year. Saint Leo Corp. has determined an arm’slength range of reliable transfer prices to be $5.00–$6.00.
Required:
1Determine the transfer price within the arm’s-length range that would maximize Saint Leo Corp’s after-tax
cash flow from the sale of insulated wire in the United States.
2-
Now assume that the withholding tax rate on dividends is 0 percent. Determine the transfer price within the
arm’s-length range that would maximize Saint Leo Corp’s after-tax cash flow from the sale of insulated wire in
the United States.
Students must provide details work for each question.
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