20.27 Suppose a foreign subsidiary earns $1 million after paying foreign income
ID: 1170460 • Letter: 2
Question
20.27 Suppose a foreign subsidiary earns $1 million after paying foreign income taxes of $800,000. If the subsidiary pays a dividend of $600,000, what is the amount of the indirect foreign tax credit that its parent will receive?
a) $480,000
b) $800,000
c) $400,000
d) it receives no foreign tax credit
20.28 Suppose a foreign subsidiary earns $2 million after paying foreign income taxes of $500,000. If the subsidiary retains all of its earnings, what is the amount of the indirect foreign tax credit that its parent will receive?
a) $500,000
b) $250,000
c) $400,000
d) it receives no foreign tax credit
20.31 Arco ships 15 million barrels of refined oil monthly from Arco Canada to Arco U.S. Arco U.S. has to pay a U.S. ad valorem tariff of 6%. Tax accountants advise Arco that it can set the transfer price in the range of $15 $18 per barrel of product. The current price is set at $16 a barrel. If Arco-Canada's tax rate is 50% (the U.S. rate is 46%., what is the incremental cash flow per month associated with using the optimal transfer price?
a) $236,000
b) $1,343,000
c) $1,086,000
d) $32,670
20.32 Suppose affiliate A sells 10,000 chips monthly to affiliate B at a unit price of $15. A's tax rate is 45% and B's tax rate is 55%. In addition, B must pay an ad valorem tariff of 12% on its imports. If the transfer price on chips can be set anywhere between $11 and $18, how much can the total monthly cash flow of A and B be increased by switching to the optimal transfer price?
a) $3,000
b) $4,000
c) $1,840
d) $1,380
Explanation / Answer
Since, multiple questions have been posted, I have answered the first two.
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Question 20.27:
$480,000. (which is Option A)
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Explanation:
Since, the entire amount of balance income has not been paid out as dividends, we will have to calculate the value of indirect foreign tax credit with the use of following formula for deemed-paid foreign tax credit:
Deemed-Paid Foreign Tax Credit = Dividend Received Including WithholdingTax/After-Tax Net Earnings of Foreign Subsidiary*Creditable Foreign Taxes = 600,000/1,000,000*800,000 = $480,000 (which is Option A)
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Question 20.28:
It receives no foreign tax credit. (which is Option D)
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Explanation:
Indirect foreign tax credit is available with respect to the tax that the company is supposed to pay on the dividends received from the foreign subsidiary. In the given case, the subsidiary has not paid any dividends to the parent company. Therefore, the company will not be entitled to receive any amount of indirect foreign tax credit.
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