Reference no: EM132960876
Question - Tio, Inc. a U.S. parent owns two subsidiaries, Ecuador Inc. and Taiwan Inc. The corporate tax rate is 20% in Ecuador and 40% in Taiwan. It costs Ecuador Inc. $25 to assemble each widget. Ecuador Inc. sells all 1,000 widgets of its production to Taiwan Inc. at a negotiated price of $65 per unit. Taiwan Inc. sold all 1,000 widgets to independent customers for $90 per unit.
1. How much is the group's (i.e., single economic unit's) world-wide gross profit?
(a) $25,000
(b) $65,000
(c) $90,000
(d) $130,000
2. Is the group's (i.e., single economic unit's) world-wide gross profit arm's length?
(a) No, because Ecuador and Taiwan are related entities.
(b) No, because the subsidiaries are engaged in intercompany transactions
(c) Yes, because Ecuador pays its vendors an arm's length price and Taiwan sells its product at an arm's length price.
(d) Yes, because the intercompany price is a fairly negotiated price.
3. What is the group's (i.e., single economic unit's) overall tax rate?
a) 27.69% b) 25.5% c) 28.5% e) 21%
4. If Tio wants to minimize world-wide taxes, it should direct
(a) Ecuador to increase the price it charges to Taiwan for each widget. (b) Taiwan to reduce the price it charges its customers.
(c) Taiwan not to pay any dividends to Ecuador.
(d) Ecuador not to pay any dividends to Taiwan.
(e) All of the above.
5. What will the group's overall gross profit be if Taiwan paid $80 per unit?
(a) $10,000
(b) $55,000
(c) $65,000
(d) $90,000
6. What will the overall tax rate be if Tio instructed Ecuador to increase the price it charged Taiwan for each widget to $80 per unit?
a) 25% b) 28% c) 21% d) 23.08%