Question

Tax credits A U.S.-based MNC has a foreign subsidiary that earns $246,000 before local taxes, with all the after-tax funds to be available to the parent in the form of dividends. The applicable taxes consist of a 32% foreign income tax rate, a foreign dividend withholding tax rate of 9.2 %, and a U.S. tax rate of 28%.

Calculate the net funds available to the parent MNC if:

a. If foreign taxes can be applied as a credit against the MNC's U.S. tax liability, the net funds available to the U.S. company is _______ (Round to the nearest dollar.)

b. If no tax credits are permitted, the net funds available to the U.S. company is $______ (Round to the nearest dollar.)

Answer 1

Solution:-

Receipt of dividends by MNC:-

Account name	Amount
Before local taxes on foreign subsidiary	$246,000
Foreign income tax	= 246,000 * 32% = 246,000 * 0.32 = $78,720
Dividends there to be declared	= 246,000 - 78,720 = $167,280
foreign dividend withholding tax rate of 9.2%	= 167,280 * 9.2% = 167,280 * 0.092 = $15,389.76
Receipt of dividends by MNC	= 167,280 - 15,389.76 = $151,890.24

a. If foreign taxes can be applied as a credit against the MNC's U.S. tax liability :-

Account name	Amount
MNC additional income	$246,000
U.S tax rate of 28%	= 246,000 * 28% = 246,000 * 0.28 = $68,880
Total foreign taxes paid	= 78,720 + 15,389.76 = $94,109.76
Tax due in U.S	$0
Net funds available to US company is	= 246,000 - 94,109.76 = $151,890.24

  If foreign taxes can be applied as a credit against the MNC's U.S. tax liability, the net funds available to the U.S. company is $151,890 .

b. If no tax credits are permitted:-

Account name	Amount
Receipt of dividends by MNC	$151,890.24
Tax liability in U.S	= 151,890.24 * 28% = 151,890.24 * 0.28 = $42,529.2
MNC - net funds available	=  $151,890.24 -  $42,529.2 = $109,360.97 = $109,361

  If no tax credits are permitted, the net funds available to the U.S. company is $109,361.