Tailor Johnson, a U.S. maker of fine menswear, has a subsidiary in Ethiopia. Thi
ID: 2772419 • Letter: T
Question
Tailor Johnson, a U.S. maker of fine menswear, has a subsidiary in Ethiopia. This year, the subsidiary reported and repatriated earnings before interest and taxes (EBIT) of 255 million Ethiopian birrs. The current exchange rate is 7.2441 birr/$ or S = $0.1380/birr. The Ethiopian tax rate on this activity is 36%. U.S. tax law requires Tailor Johnson to pay taxes on the Ethiopian earnings at the same rate as profits earned in the United States, which is currently 45%.However, the United States gives a full tax credit for foreign taxes paid up to the amount of the U.S. tax liability. What is Tailor Johnson’s U.S. tax liability on its Ethiopian subsidiary?
Explanation / Answer
Tax in Ethiopia (Paid) = 255 Million * 36% = 91.80 Million Ethiopian birrs
Tax in Ethiopia (Paid) ( in US $) = 91.80 * 0.1380 = $ 12,668,400
Gross Tax Liability in US = 255000000*0.1380 * 45% = $ 15,835,500
Less : tax credit for foreign taxes paid = $ 12,668,400
Tailor Johnson’s U.S. tax liability = $ 3,167,100
Answer
Tailor Johnson’s U.S. tax liability = $ 3,167,100
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