Reference no: EM132666217

International Lamp Company (ILC), a US taxpayer, manufactures crystal chandeliers at its wholly-owned subsidary in Poland (Polampa) at a production cost of $185 per chandelier. Polampa chandeliers are sold to two customers in the United States - Lighting Supermart (an ILC wholly-owned subsidary) and Home Store (an unaffiliated customer). Polampa and Lighting Supermart are related parties and transactions between them fall under Section 482 of the U.S. Internal Revenue Code.

• The cost to transport the chandeliers to the US is $15 per unit and is paid by Polampa. Other Polish manufactures of crystal chandeliers sell to customers in the US at a markup on total cost (production plus transportation cost) of 40%. Polampa sells chandeliers to Home Store at a landed price of $320 per unit (Polampa pays transportation costs). Home Store pays applicable US import duties of 2% on its purchases of chandeliers. Lighting Supermart also pays import duties on its purchases from Polampa. Consistent with industry practice, Home Stores place a 50% markup on the total cost of a chandelier and sells them at a retail price of $389.60 per unit. Lighting Supermart sells Polampa chandeliers at a retail price of $359.00 per unit. Polampa is a Polish taxpayer, and Lighting Supermart is a US taxpayer. Assumer the following rates apply.

Polish Corporate income tax rate = 19%
Polish withholding tax rate on dividends = 19%
U.S. corporate income tax rate = 21%
U.S. ad valorem import duty = 2%

Problem 1: Determine three possible prices for the sale of crystal chandeliers from Polampa to Lighting Supermart that comply with US tax regulations under (a) the comparable uncontrolled price method, (b) the resake price method, (c) the cost-plus method. Assume that non of the three methods is clearly the best method and that ILC would be able to justify any of the three prices for both US and Polish tax purposes.