Orbit Corporation (“Orbit”), is a U.S. corporation, has established in Country C

Question

Orbit Corporation (“Orbit”), is a U.S. corporation, has established in Country C a branch office that coordinates the export sales throughout Africa of Orbit products manufactured by Orbit in the United States. Since the office is not actually engaged in the sales transactions, which are handled by Orbit’s export division in New York, no revenue appears on the books of the Country C branch; only the expenses of the office are reflected on its books. Country C has a generally applicable income tax. Recognizing, however, the difficulty of determining the proper amount of the net export income attributable to the Country C branch office, the Country C tax authorities issue a ruling to the effect that the branch will be taxed on the assumption that the gross income of the office will equal 120% of the expenses of the office. This assumed income less the actual expenses of the office will be subject to the generally applicable Country C income tax of 35%. Will the resulting Country C tax will be creditable?

Explanation / Answer

In the given case, Country C does not have any income that should be taxable in the given country. Although it has been stated that as per the assumption by tax authorities income is 120% of the expenses of the office. Country C has a genrally applicable Income tax rate of 35%. So on the Net income i.e. Gross income Less Expenses of the branch office, will be subject to Tax @35%.

For Ex: Lets assume that the expenses of the Country C office is $100. So the Gross income would be $120 (being 120% of the expenses)

Now,

Net Income = Gross income - Expenses

= $120 - $100 = $20

As per the Income Tax rate @35%, the tax would be $20@35%= $7

Accordingly, In This case we can say that Tax is creditable by the tax Country C.

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