Brandy, a U.S. corporation, operates a manufacturing branch in Chad, which does

Question

Brandy, a U.S. corporation, operates a manufacturing branch in Chad, which does not have an income tax treaty with the United States. Brandy's worldwide Federal taxable income is $30,000,000, so it is subject to a 35% marginal tax rate. Profits and taxes in Chad for the current year are summarized as follows.

Compute Brandy's foreign tax credit associated with its operations in Chad.

Income Item Chad Income
This Year Chad Tax
Rate Chad Tax
Paid Manufacturing profits $2,500,000 20% $500,000 Dividend 300,000 5% 15,000

Explanation / Answer

Since Brandy has paid taxes on income of foreign country at a lower rate ( 20% and 5%) compared to that of home country tax rate (35%) , Brandy is eligible to get a tax credit for the tax paid at lower rates i.e. in the foreign country

Therefore tax credit available to Brandy : 500000 + 15000 = $515000

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