Walrus Co Mining, a U.S.-based MNC has a foreign subsidiary that earns $1,050,00
ID: 1171225 • Letter: W
Question
Walrus Co Mining, a U.S.-based MNC has a foreign subsidiary that earns $1,050,000 before local taxes, with all the after tax funds to be available to the parent in the form of dividends. The foreign income tax rate is 30%, the foreign dividend withholding tax rate is 15%, and the firm's U.S. tax rate is 35%. What are the funds available to the parent MNC if foreign taxes can be applied as a credit against the MNC's U.S. tax liability?
A) $624,750
B) $425,250
C) $257,250
D) $735,000
Explanation / Answer
Foreign tax on income = $1,050,000 x 30% = $315,000
Remaining distributable income = $1,050,000 - $315,000 = $735,000
Dividend withholding tax = $735,000 x 15% = $110,250
Amount to be actually distributed = $735,000 - $110,250 = $624,750
Now, total foreign tax credit (FTC) available = $315,000 + $110,250 = $425,250
This amount can be used against US tax liability.
US tax liability = $1,050,000 x 35% = $367,500
Therefore, the US tax liability will be nil after using FTC as FTC available is more than the tax liability.
So, Funds available to the parent MNC = $624,750 (option A)
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