a. What would be the worldwide effective tax rate on the $1 million of foreign p
ID: 2714496 • Letter: A
Question
a. What would be the worldwide effective tax rate on the $1 million of foreign profits, assuming the U.S. taxes the worldwide income of domestic corporations, but allows an unlimited credit for foreign income taxes? b. What would be the worldwide effective tax rate on the $1 million of foreign profits, assuming the U.S. allows a credit for foreign income taxes, but the credit is limited to the U.S. tax attributable to foreign-source income? c. How would your answer to part (b) change if the foreign tax rate was 30% rather than 50%?
Explanation / Answer
Answer:a. $10,000,000 x 35% = 3,500,000 pre-credit tax
$1,000,000 x 50% = 500,000 foreign taxes paid
Total US taxes owed = 3,500,000 – 500,000 = $3,000,000
ETR = 3,000,000/10,000,000 = 30%
Answer:b $10,000,000 x 35% = 3,500,000 pre-credit tax
$1,000,000 x 50% = 500,000 foreign taxes paid
Total US taxes owed = 3,500,000 – (35% x 1,000,000) = $3,150,000
ETR = 3,150,000/10,000,000 = 31.5%
Answer:c $10,000,000 x 35% = 3,500,000 pre-credit tax
$1,000,000 x 30% = 300,000 foreign taxes paid
Total US taxes owed = 3,500,000 – (35% x 1,000,000) = $3,150,000
ETR = 3,150,000/10,000,000 = 31.5%
The answer would not change because credit is limited to the U.S. tax attributable to foreign-source income.
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