Diss:# 7: Intercompany Transactions – International Transfer Pricing

NEW Corporation, based in Sydney, Australia, has a wholly owned subsidiary in Taiwan. The Taiwanese subsidiary manufactures bicycles at a cost of $20 per unit and sells the bicycles to NEW Corp at an FOB shipping point price of $100 each. NEW pays shipping costs of $10 per bicycle and an import duty of 10 percent on the $100 invoice price. NEW sells the bicycles in Australia for $200 each. The Australian tax authority discovers that NEW’s Taiwanese subsidiary also sells its bicycles to uncontrolled Australian customers at a price of $80 each. Accordingly, Australian tax authority makes a transfer pricing adjustment to NEW’s tax return that decreases NEW’s cost of goods sold by $20 per bicycle. An offsetting adjustment (refund) is made for the import duty previously paid. The effective tax rate in Taiwan is 25 percent and in Australia is 36 percent. Required Discuss NEW Corporations decision to allow its Taiwanese subsidiary to charge a higher price to NEW than to uncontrolled customers in Australia. Assess the likelihood that the Taiwanese tax authority will provide a correlative adjustment to NEW Corp.