The Great Big Company (GBC)is a CCPC Located in Saskatchewan

question 5

Essay

The Great Big Company (GBC)is a CCPC located in Saskatchewan.GBC owns a foreign subsidiary,The Little Company (TLC),which is located in a foreign country.GBC manufactures electronic component parts which are then sold to TLC for assembly.GBC is subject to a 25% corporate tax rate and TLC is subject to a 19% corporate tax rate.Fiona Big,the CEO of GBC,has mentioned that due to the lower tax rate in the foreign country,the profits of GBC could be shifted to TLC by adjusting the selling price of the component parts.
Required:
A)Can Fiona Big adjust the selling price of the component parts in order to take advantage of the lower tax rate? Why or why not?
B)What are three methods used to establish transfer prices for non-arm's length transactions?

• A)Can Fiona Big adjust the selling price of the component parts in order to take advantage of the lower tax rate? Why or why not?
• B)What are three methods used to establish transfer prices for non-arm's length transactions?

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Definitions:

Real

Pertaining to tangible or actual assets, situations, or values, as opposed to hypothetical or projected ones.

Relative Purchasing Power Parity

This economic theory suggests that the exchange rate between two currencies will adjust to reflect changes in the price levels of the two countries, maintaining the purchasing power of each currency.

Expected Inflation

The rate at which prices for goods and services are anticipated to rise over a future period, as forecasted by economists or financial markets.

Relative Purchasing Power Parity

A theory in economics that suggests that changes in the exchange rates between currencies are in direct proportion to changes in the countries' price levels.