Question

a) Northwest Inc. operates manufacturing facilities in Portland Oregon and Vancouver, Canada. In the current year, the Portland plant generated $3.1 million net domestic taxable income and the Vancouver plant generated $4.8 million net foreign taxable income. The Vancouver plant is not held through a Canadian subsidiary.

What is Northwest's current year taxable income?

b) In the example above, how much U.S. tax could Northwest save in the current year if it held its Vancouver plant through a Canadian subsidiary? Assume a 34% U.S. tax rate and a 25% Canadian tax rate. Remember that the Canadian tax would be credited against the U.S. tax if the Vancouver income were currently taxable in the U.S.

Answer 1

Answer: Northwest's current year taxable income would be $ 7.9 million, if Vancouver plant is not held through a Canadian Subsidiary. The tax payable on such income would be $7.9 million* 34% = $ 2.686 milion

If Vancouver plant is held through a Canadian Subsidiary, then the taxable income of manufacturing facilities of Northwest Inc., in Portland Oregan and Vancouver, Canada would be taxable in the respective countries.

Thus, Tax payable at Vancouver would be $4.8 million* 25% = $1.2 million

While, Tax payable at U.S would be $ 3.1 million*34% = $ 1.054 million

If the Vancouver income is currently taxable in the U.S., Northwest Inc. will get credit of the tax payable on Vancouver income, i.e., $1.2 million + $ 1.054 million = $2.254 million.

Hence, total tax saved in the current year if it held its Vancouver plant through a Canadian subsidiary would be $2.686 million - $ 2.254 million = $ 0.432 million.