Determine the amount of U.S. taxable income, U.S. foreign tax credit and net U.S

Question

Determine the amount of U.S. taxable income, U.S. foreign tax credit and net U.S. tax liability related to the British subsidiary (all in US. dollars). Mama Corporation (a U.S. taxpayer) has a wholly owned sales subsidiary in the Bahamas (Bahamamama Ltd.) that purchases finished goods from its U.S. parent and sells those goods to customers throughout the Caribbean basin. In the most recent year, Bahamamama generated income of $100,000 and distributed 50 percent of that amount to Mama Corporation as a dividend. There are no income or withholding taxes in the Bahamas. a. Determine the amount of income taxable in the United States assuming that Bahamamama makes 20 percent of its sales in the Bahamas and 80 percent in other countries. b. Determine the amount of income taxable in the United States assuming that Bahamamama makes 40 percent of its sales in the Bahamas and 60 percent in other countries. Lionais Company has a foreign branch that earns income before income taxes of 500 000 currency units (CU). Income taxes paid to the foreign government are CU 150,000 (30 percent). Sales and other taxes paid to the foreign government are CU 50,000. Lionais Company must include the CU 500,000 for foreign branch income in determining its home country taxable income.

Explanation / Answer

By purchasing finished goods from its parent company and selling those goods outside of the Bahamas, Bahama-mama Ltd. generates foreign base company sales income , which is Subpart F income.

a)

80% of Bahama-mama’s income is subpart F income, so 100% of its income will be taxed currently in the United States.

U.S. taxable income is $100,000 [100% * $100,000]

b).

60% of Bahama-mama’s income is subpart F income, so 60% of its income will be taxed currently in the United States.

U.S. taxable income is $80,000 [(60% * $100,000) + (40% * $100,000 x 50%)].

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