ACME corporation (CEO: Coyote) has nationwide operations and branches in many states in USA. Ignore actual taxation jurisdiction and taxation entity.
A. Suppose that West Virginia (WV) branch (manager: Meme) is subject to a tax rate that is significantly lower than California (CAL) branch's tax rate. When WV branch purchases a component from CAL branch, ACME corporation may have incentive to minimize the corporate income tax in terms of transfer pricing on the component. Consequently, the transfer price of the component would tend to be high or low? Explain briefly (in no more than 3 ).
B. Suppose that West Virginia (WV) government introduces a Research & Development (R&D) rebate system, under which the WV branch (manager: Meme) will recover 50% of R&D expenses in terms of tax rebate from the WV government. ACME corporation may have incentive to maximize the after-tax wealth by taking advantage of the R&D rebate system. As a result, ACME wants to significantly increase R&D expenses of the WV branch. In order to induce the WV branch manager(Meme)' s productive effort, ACME would better arrange the WV branch manager(Meme)'s compensation on the branch accounting income or corporation stock price? Explain briefly (in no more than 3 ).
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