In working with the foreign tax credit, a U.S. corporation may be able to alleviate the problem of excess foreign taxes by:
Added by Francisco Javier M.
Step 1
S. corporations to reduce their U.S. tax liability by the amount of foreign taxes paid on income earned abroad, preventing double taxation. Show more…
Show all steps
Your feedback will help us improve your experience
Jennifer Stoner and 85 other Principles of Accounting educators are ready to help you.
Ask a new question
Labs
Want to see this concept in action?
Explore this concept interactively to see how it behaves as you change inputs.
Recommended Videos
When a U.S. person is in an excess credit position, the noncreditable foreign income taxes increase the total tax burden on foreign-source income beyond what it would have been if only the United States had taxed that income. Identify two strategies for reducing excess credits
Jennifer S.
Worldwide United Corporation (WUC), a U.S. taxpayer, manufactures and sells products through a network of foreign branches and wholly-owned foreign subsidiaries. Relevant information for these entities for the current fiscal year appears in the following table: Dividend Income Withholding Tax Rate Tax Rate 0% 0% 0 0 16.5 0 9 0 12.5 0 24 0 30 5 17 35 Net Dividend Received by Parent $1,000,000 8,000,000 8,350,000 9,100,000 1,750,000 7,600,000 3,325,000 269,750 Legal Entity Country Form Activity A Bahrain Branch Sales B Bermuda Corporation Sales C Hong Kong Corporation Manufacturing D Hungary Corporation Sales E Ireland Corporation Investment F Malaysia Branch Manufacturing G Mexico Corporation Manufacturing H Switzerland Corporation Service Income before Tax $1,000,000 8,000,000 10,000,000 10,000,000 2,000,000 10,000,000 5,000,000 500,000 Additional Information: 1. Entities C, F, and G manufacture products that are sold in their home countries as well as to sister entities within the WUC group. 2. Entity A purchases finished products from Entity F and then sells them throughout the Middle East. Only 5 percent of A's income is generated from sales to customers in Bahrain; 95 percent of A's income is from sales to foreign customers. 3. Entity B purchases finished products from Entity G and sells them throughout North and South America. Only 1 percent of B's income is from sales to customers in Bermuda; 99 percent of B's income is from sales to foreign customers. 4. Entity D purchases finished products from Entity C and then sells them throughout Europe. Only 40 percent of D's income is generated from sales to customers in Hungary; 60 percent of D's income is from sales to foreign customers. 5. Entity E makes passive investments in stocks and bonds in European financial markets. All of E's income is derived from dividends and interest. 6. Entity H provides accounting and other management services to WUC's other foreign operations. All of H's income is derived from providing services to sister companies within the WUC group. Required: 1. Determine the amount of U.S. taxable income for each entity (A, B, C, D, E, F, G, and H). 2. Calculate the foreign tax credit allowed in the United States, first by foreign tax credit basket and then in total. 3. Determine the net U.S. tax liability on foreign source income. 4. Determine any excess foreign tax credits and identify by basket.
Akash M.
Currently, U.S. corporations exporting products into other countries pay corporate taxes in those other countries. For many corporations, cash builds up on their balance sheet and remains in a bank in the foreign country. Corporations would like to send their cash back to the "mother ship" in the United States. Current tax law would tax that "repatriation" of cash as a second set of profits. Is this second taxing a good idea or a bad idea? If it remains in place, what is the effect on consumers, workers, and firms?
Recommended Textbooks
Horngren’s Cost Accounting
Cost Accounting A Managerial Emphasis
Principles of Accounting Volume 1: Financial Accounting
Transcript
18,000,000+
Students on Numerade
Trusted by students at 8,000+ universities
Watch the video solution with this free unlock.
EMAIL
PASSWORD