Reference no: EM131708339

Question: Sister Subsidiaries. Subsidiary Alpha in Country Able faces a 40% income tax rate. Subsidiary Beta in Country Baker faces only a 20% income tax rate. Presently, each subsidiary imports from the other an amount of goods and services exactly equal in monetary value to what each exports to the other. This method of balancing intracompany trade was imposed by a management keen to reduce all costs, including the costs (spread between bid and ask) of foreign exchange transactions. Both subsidiaries are profitable, and both could purchase all components domestically at approximately the same prices as they are paying to their foreign sister subsidiary. Does this seem like an optimal situation?