Export tax incentives for establishing foreign markets: An analysis of marginal costing techniques

The tax law provides 2 administrative pricing methods for allocating profit between a foreign sales corporation and its related supplier. This study conducts sensitivity analyses to determine the impact and interaction effects of 4 study variables: 1. export profit rate, 2. domestic profit rate, 3. relative size of the export market, and 4. the impact of overhead costs. Simulation results suggest that marginal costing is most beneficial when export profit rates are low and the export market is small relative to the exporter's total market. Thus, small businesses and new-to-export firms attempting to establish or maintain a foreign market are particularly good candidates for marginal costing. Further, the tax benefit is generally greater for companies in which overhead is at least 30% of product cost.