Chinglish Dirk Company (Hong Kong) exports razor blades to its wholly owned parent company, Torrington Edge (Great Britain). Hong Kong tax rates are 16% and British tax rates are 30%. Chinglish calculates its profit per container as follows (all values in British pounds).
|
Constructing Transfer (Sales) Price per Unit |
Chinglish Dirk (British pounds) |
Torrington Edge (British pounds) |
|
Direct costs |
£10,000 |
£16,100 |
|
Overhead |
4,000 |
1,000 |
|
Total costs |
£14,000 |
£17,100 |
|
Desired markup |
2,100 |
2,565 |
|
Transfer price (sales price) |
£16,100 |
£19,665 |
|
Income Statement |
||
|
Sales price |
£16,100,000 |
£19,665,000 |
|
Less total costs |
(14,000,000) |
(17,100,000) |
|
Taxable income |
£2,100,000 |
£2,565,000 |
|
Less taxes |
(336,000) |
(769,500) |
|
Profit, after-tax |
£1,764,000 |
£1,795,500 |
Chinglish Dirk (A). Corporate management of Torrington Edge is considering repositioning profits within the multinational company. What happens to the profits of Chinglish Dirk and Torrington Edge, and the consolidated results of both, if the markup at Chinglish was increased to 20% and the markup at Torrington was reduced to 10%? What is the impact of this repositioning on consolidated tax payments?
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