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How the consolidated entity could reduce overall tax burden

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Reference no: EM132575413

Soft Linen Co. is a New Zealand textile manufacturing firm with a wholly owned subsidiary in France. The New Zealand parent company exports linen to its wholly owned subsidiary. Both companies have a transfer price markup of 15%.

The New Zealand corporate income tax rate is 30%, and the corporate income tax rate in France is 23%.

Total production costs, including overheads, to the New Zealand parent company are $11.50 per unit. Overhead costs to the subsidiary in France are $2.00 per unit. Total sales volume is 1,000,000 units.

The company reports consolidated profits in New Zealand dollars.

Required:

Question 1: Calculate the after tax profit for the consolidated entity?

Question 2: What is the effective tax rate for the consolidated entity?

Question 3: Explain how the consolidated entity could reduce its overall tax burden by changing the transfer price markup between the New Zealand parent and subsidiary in France?

Reference no: EM132575413

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