Tailor Johnson, a U.S. maker of fine menswear, has a subsidiary in Ethiopia. Thi
ID: 2799318 • Letter: T
Question
Tailor Johnson, a U.S. maker of fine menswear, has a subsidiary in Ethiopia. This year, the subsidiary reported and repatriated earnings before interest and taxes (EBIT) of 202 million Ethiopian birrs. The current exchange rate is 7.1844birrs/dollar or S=$0.1392/birr. The Ethiopian tax rate on this activity is 28 %. U.S. tax law requires Tailor Johnson to pay taxes on the Ethiopian earnings at the same rate as on profits earned in the United States, which is currently 44 %. However, the United States gives a full tax credit for foreign taxes paid up to the amount of the U.S. tax liability. What is Tailor Johnson's U.S. tax liability on its Ethiopian subsidiary?
Explanation / Answer
Exchange Rate =7.1844 birrs/dollar or S=$0.1392/birr
Repatriated Earnings =202 million birrs
Repatriated Earnings in USD terms =$202x0.1392 =$28.1184 million
US Johnson's Tax Liability on its Ethiopian Subsidiary =$28.1184 x 0.44 =$12.37 million
Taxes Paid in Ethiopia for which credit can be claimed =0.28 x 212 million birr =59.36 million birr or $8.26 million
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