Whelan Pharmaceuticals: Tax Factors and Global Site Selection - Case Solution

To: Executive Committee, Whelan Pharmaceuticals

Facts

Whelan Pharmaceuticals is a U.S. drug manufacturer headquartered in Maryland. The Location and Sourcing Committee needs to decide where to manufacture its newest product, Varex, while considering factors such as marketing, manufacturing, and tax consequences.

The destination for possible facilities includes Maryland, Ireland, Puerto Rico, and Continental Europe. The committee is comprised of three people: John Neal, vice president for manufacturing and engineering; Stefan Bischel, the vice president for worldwide marketing and international planning; and Linda Gonzalez, executive director of taxes.

Issues

1. What tax issues are relevant to Whelan Pharmaceuticals in deciding where to manufacture Varex?
2. What nontax factors are included in the decision?
3. How does each member of the Location and Sourcing Committee weigh the factors?
4. Was the correct decision made to narrow the choice down to Ireland and Continental Europe?
5. Where should Whelan manufacture Varex, and why?

Conclusions

1. The tax issues relevant in deciding where Whelan Pharmaceuticals should manufacture Varex are profit splitting and tax rate by country, affecting credits and deferral options.
2. The non-tax factors include customs and duties and treasury questions.
3. Each member of the Sourcing Committee weights the factors according to the benefit of their own respective department. John Neal weights the manufacturing details as the most important, Stefan Bischel regards marketing as the most important factor, while Linda Gonzalez regards the tax consequences as her most important.
4. The correct decision was made to narrow down the final choice to Ireland or Continental Europe.
5. Whelan should manufacture Varex in Ireland to expand its presence and meet its strategic objectives.

Discussion

1. 482 determines if a transaction between related entities does not satisfy the arm’s length standard, and if it does, the IRS has the authority to reallocate income, deduction, credits, and allowances to determine true taxable income and prevent tax evasion.

To avoid this situation and not play any transfer pricing games, Whelan Pharmaceuticals currently uses the…