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East Meets West Ltd. is a Canadian company with a fully owned subsidiary in the UK. The UK subsidiary produces a component for off shore gas compressors that are sold in Canada. The components have a variable cost of 1,700 Euros and a full cost of 2,100 Euros. The 2,000 components required can be purchased in Canada for $3,500. Assume the minimum transfer price allowed by the Canadian tax authorities is the variable cost and the maximum is the market value. Also assume operating income in each country is equal to taxable income. One Euro is worth $1.45 Canadian. The marginal tax rate in Canada is 25% and in Ireland 12.5%.
Question a. What transfer price should be set for East Meets West Ltd. to minimize its total income taxes? Show your calculations.
Question b. If East Meets West Ltd. desires to minimize its total income taxes, calculate the amount of tax liability in each country in Canadian dollars.
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