Smeal College of Business Pennsylvania State University Managerial Accounting B A 521 Professor Huddart Anita Corporation1 Multinational transfer pricing and taxation Anita Corporation headquartered in the U S manufactures state ofthe art milling machines It has two marketing subsidiaries one in Brazil and one in Switzerland that sell its products Anita is considering building one new machine at a cost of 500 000 There is no market for the equipment in the United States The equipment can be sold in Brazil for 1 000 000 but the Brazilian subsidiary would incur transportation and modification costs of 200 000 Alternatively the equipment can be sold in Switzerland for 950 000 but the Swill subsidiary would incur transportation and modification costs of 250 000 The U S company can sell the equipment either to its Brazilian subsidiary or to its Swiss subsidiary but not to both Anita Corporation and its subsidiaries operate in a very decentralized manner Managers in each company have considerable autonomy with each division manager interested in maximizing his or her own division s income Required 1 From the viewpoint of Anita and its subsidiaries taken together should Anita Corporation manufacture the equipment If it does where should it sell the equipment to maximize corporate operating income What would the operating income for Anita and its subsidiaries be from the sale Ignore any income tax effects 2 What range of transfer prices will result in achieving the actions determined to be optimal in requirement 1 Explain your answer 3 The effective income tax rates for this transaction follow 40 in the United States 60 in Brazil and 15 in Switzerland The tax authorities in the three countries are uncertain about the cost of the intermediate product and will allow any transfer price between 500 000 and 700 000 If Anita and its subsidiaries want to maximize after tax operating income a should the equipment be manufactured and b where and at what price should it be transferred 1 Richard Lambert adapted c Steven Huddart 1995 2009 All rights reserved www personal psu edu sjh11 B A 521 Anita Corporation 4 Now suppose each manager acts autonomously to maximize his or her own subsidiary s after tax operating income The tax authorities will allow transfer prices only between 500 000 and 700 000 Which subsidiary will get the product and at what price Is your answer the same as your answer in requirement 3 Explain why or why not Page 2