ABC, Inc., a domestic corporation, owns 100% of HighTax, a foreign corporation.

Question

ABC, Inc., a domestic corporation, owns 100% of HighTax, a foreign corporation. HighTax has $50,000,000 of undistributed E & P, all of which is attributable to general limitation income, and $30,000,000 of foreign income taxes paid. HighTax distributes a $5,000,000 dividend to ABC. The dividend, which is subject to a 5% foreign withholding tax, is ABC's only item of income during the year. The U.S. tax rate is 35%.

a. ABC's deemed-paid taxes on the dividends are $, and the foreign withholding taxes actually paid are $____

b. The foreign tax credit claimed is $____

c.   ABC now has excess foreign tax credits of $ ____is in general limitation basket.

Explanation / Answer

a) ABC's deemed-paid taxes on the dividends = $ 5 million * 35%

=$1.75million

foreign withholding taxes actually paid =$5 million * 5%

= $0.25 million.

b) Foriegn tax credi claimed = $1.75 - $0.25 =$1.5 million

c) $0.25 million

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