Spartan Corporation, a U.S. corporation, reported $5.4 million of pretax income
ID: 2578415 • Letter: S
Question
Spartan Corporation, a U.S. corporation, reported $5.4 million of pretax income from its business operations in Spartania, which were conducted through a foreign branch. Spartania taxes branch income at 25 percent, and the United States taxes corporate income at 35 percent. (Enter your answers in dollars and not in millions of dollars.)
a. If the United States provided no mechanism for mitigating double taxation, what would be the total tax (U.S. and foreign) on the $5.4 million of branch profits?
b. Assume the United States allows U.S. corporations to exclude foreign source income from U.S. taxation. What would be the total tax on the $5.4 million of branch profits?
c. Assume the United States allows U.S. corporations to claim a deduction for foreign income taxes. What would be the total tax on the $5.4 million of branch profits?
d-1. Assume the United States allows U.S. corporations to claim a credit for foreign income taxes paid on foreign source income. What would be the total tax on the $5.4 million of branch profits?
d-2. Assume the United States allows U.S. corporations to claim a refundable credit for foreign income taxes paid on foreign source income. What would be your answer if Spartania taxed branch profits at 40 percent?
What is the total tax for a-d2?
Explanation / Answer
A) if the united state has no Mechanism for mitigating double taxation, then the income earned in other country will effect both country taxes.
Total Tax on Income Earned:
Spartania Taxes ( $ 5.4 x 25%) = $13,50,000
United State Taxes(5.4 x35% ) =$ 18,90,000
Toal Tax Liability =$32,40,000
B) If US Excludes the foregin source of income from US taxation then Tax /liability
Spartania Taxes ( $ 5.4 x 25%) = $13,50,000
United State Taxes = 0
Toal Tax Liability =$13,50,000
C) If US allows foregin taxation to claim as a deduction then tax liability is as follows
Spartania Taxes ( $ 5.4 x 25%) = $13,50,000
United State Taxes =$ 14,17,500 (54,00,000-13,50,000)*35%
Toal Tax Liability =$27,67,500
D) If US allows foregin taxation to claim as a credit of then tax liability is as follows
Spartania Taxes ( $ 5.4 x 25%) = $13,50,000
United State Taxes =$ 5,40,000 (18,90,000-13,50,000)
Toal Tax Liability =$18,90,000
D2)If US allows foregin taxation to claim as a refund of credit , then tax liability is as follows
Spartania Taxes ( $ 5.4 x 40%) = $21,60,000
United State Taxes =$ (2,70,000)(18,90,000-21,60,000)
Toal Tax Liability =$18,90,000
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