Topic: Transfer pricing between controlled entities Part 1. Sale without using a related party. J&J is a U.S. corporation that manufactures and sells inventory to an unrelated foreign customer. The sales price for the inventory is $1,000 and the related cost of goods sold is $600. J&J reports: Sales revenue $1,000 Less: COGS (600)Profit 400 x U.S. tax rate x 35%U.S. tax liability 140 If J&J has no business presence in the foreign jurisdiction and is merely selling to a customer located there, the foreign government is unlikely to impose any local tax on the U.S. corporation. Consequently, the total tax burden on the sale is $140. Part 2. Sale using a related foreign party. Suppose instead that J&J attempts to reduce its total tax expense by channeling the inventory sale through a foreign subsidiary located in the same country as the foreign customer. The corporate income tax rate in the foreign country is only 10%. In this case, because J&J controls the
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Taxation in the United States, foreign subsidiary