‘YesTaxi’ is a ride sharing taxi service provider that is headquartered in the U
ID: 2542443 • Letter: #
Question
‘YesTaxi’ is a ride sharing taxi service provider that is headquartered in the US. Since its establishment in 2007, YesTaxi has managed to achieve a steady growth in its consumer base due to number of smart business decisions. YesTaxi, a U.S. company, established a wholly ownedsubsidiary in India called IndTaxi. The taxation rate in India is 47 %. In the first year YesTaxi’s revenue from operations in the US (with a taxationrate in US of 30%) is $750,000 and IndTaxi’s revenue for operations in India is $250,000. Since there was a cost that was incurred by YesTaxi toset up IndTaxi in India, the gross margin for YesTaxi was 55 %. Also during the year, IndTaxi had $100,000 in costs. Assume that there are noother costs associated with either YesTaxi or IndTaxi. For this simple example, assume that when repatriating income from India back to the US,the US allows the parent to claim a 63.83% Foreign Tax Credit (you can deduct from your US Tax bill 63.83% of taxes that you paid in India on themoney that you are repatriating.)
1-How much corporate income tax will IndTaxi pay in India?
2-If no income is repatriated from IndTaxi back to the US, how much corporate income tax will be paid by YesTaxi in the US?
3-Now suppose that YesTaxi repatriates all of IndTaxi’s profits back to the US. Now how much corporate income tax will be paid by YesTaxi in the US?
Explanation / Answer
1. corporate income tax paid by IndTaxi = net income before tax × corporate tax rate
= ($250,000 - $100,000) × 0.47
= $150,000 × 0.47
= $70,500
2. Corporate tax paid by YesTaxi if no repatriation = net income × corporate tax rate
= $750,000 × 0.30
= $225,000
3. IndTaxi profit = Total revenue × gross margin
= $250,000 × 0.55
= $137,500
Total income of YesTaxi = revenue from YesTaxi + Profit repatriated
= $750,000 + $137,500
= $887,500
Total tax payable = Total income × Corporate tax rate
= $887,500 × 0.30
= $266,250
Foreign Tax credit = Amount repatriated × Corporate tax rate in foreign country I.e. India × rate of credit in US
= $137,500 × 0.47 × 0.6383
= $ 41,250
Net tax payable by YesTaxi in US = $266,250 - $41,250 = $225,000
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