PROBLEM 3 Trikeco, a domestic corporation, manufactures mountain bicycles for sa

Question

PROBLEM 3 Trikeco, a domestic corporation, manufactures mountain bicycles for sale both in the United States and Europe. Trikeco operates in Europe through Trike1, a wholly owned Italian corporation that manufactures a special line of mountain bicycles for the European market. In addition, Trike! owns 100% of Trike2, a U.K. corporation that markets Trike1's products in the United Kingdom. At end of the current year, the undistributed earnings and foreign income taxes of Trike1 and Trike2 are as follows: Trike Trike2 $90 million ..$5 llion Post-1986 undistributed earnings.. Post-1986 foreign income taxes.$36 million $27 million During the current year, Trike2 distributed a $10 million dividend to Trike1, and Trike1 distributed a $10 million dividend to Trikeco. To simplify the computations, assume that neither dividend distributions attracted any Italian or U.K. withholding taxes, and that the dividend received by Trike1 was exempt from Italian taxation. Compute Trikeco's deemed paid foreign tax credit, as well as the residual U.S. tax, if any, on the dividend Trikeco received from Trike1. Assume the US. tax rate is 35%.

Explanation / Answer

Answer:

Trikeco’s deemed-paid foreign tax credit = Trike 2 distributed dividend to Trike 1 + Trike 1 distributed dividend to Trikeco

Trikeco’s deemed-paid foreign tax credit = $10 million + $10 million

= $ 20 million

Residual U.S. Tax = Post 1986 Undistributed earning * U.S. Tax Rate

                            = $90 million * 35%

                             = $31.5 million

Answer:

Trikeco’s deemed-paid foreign tax credit = Trike 2 distributed dividend to Trike 1 + Trike 1 distributed dividend to Trikeco

Trikeco’s deemed-paid foreign tax credit = $10 million + $10 million

= $ 20 million

Residual U.S. Tax = Post 1986 Undistributed earning * U.S. Tax Rate

                            = $90 million * 35%

                             = $31.5 million

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