Method for calculating the proper transfer price

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Whether the statement is true or false.

Parent Industries, a U.S. corporation, owns 100% of the stock of SubCo, S.A., a Chilean corporation. Chile has a corporate tax rate of 20% and the U.S. corporate rate is 35%. Parent manufactures computer equipment in the U.S., then sells its goods to SubCo, who then sells the computers throughout Latin America. A computer costs $ 200 to manufacture and SubCo sells the computer in Latin America for a retail price of $ 600. Parent has been selling the computers to SubCo for $ 250, but sells the same computers to other unrelated companies for $ 375. The typical gross profit margin for SubCo when it sells other equipment is 35%. The IRS challenges the pricing between Parent and SubCo as improper transfer pricing. Parent is considering responding to the IRS challenge, but using either the CUP method or Resale Price Method for calculating the proper transfer price. Between these two, the CUP method is more advantageous to the companies than the Resale Price Method.

Reference no: EM131585913

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