Reference no: EM132569668
Question - GC sells a product to its US customers for $1,000 per unit. This product is manufactured by Gunner Singapore (GS), a wholly-owned subsidiary of GC. The product costs $300 per unit to produce in Singapore. GS sells the product to GC for $800. This means that for every unit sale of this product, GS has income of $500 ($800 - $300), and GC has income of $200 ($1,000 - $800).
Since the US tax rate is 21% and the Singapore tax rate is 10%, this is a classic income shifting tax strategy. As the tax director of GC, you are concerned that the IRS may challenge the pricing structure arrangement between GC and GS. The IRS may assert that the $800 per unit sales price charged by GS is too high resulting in too much profit earned in Singapore and not enough earned in the US.
You and your team do some analysis, and determine that if audited by the IRS the potential additional US income tax determined by the Agent could be $2,000,000 for all open years. This is an uncertain tax position.
The CFO of Gunner wants to know if he can record tax benefit for the entire $2,000,000 in the financial statements. What is the process that you would go through to determine if Gunner can book the benefit?
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