Hawkeye Networks is a U.S. corporation with $20 million of U.S. source income and no foreign-source...

Hawkeye Networks is a U.S. corporation with $20 million of U.S. source income and no foreign-source income of its own. Hawkeye Networks has wholly owned subsidiaries in Korea and Singapore. The Korean subsidiary has $43 million of pretax Korean-source income, faces a 40% Korean tax rate, and pays a $10 million dividend to Hawkeye Networks. The Singapore subsidiary has $7 million of pretax Singapore-source income, faces a 25% Singapore tax rate, and pays a $2 million dividend to Hawkeye.

a. How much taxable income will Hawkeye Networks report on its U.S. tax return? Assume repatriation of income from the foreign subsidiaries will qualify for the participation exemption for U.S. purposes.

b. Now suppose the Singapore subsidiary's income is Subpart F income. How much taxable income will Hawkeye Networks report on its U.S. tax return? Assume Hawkeye will take foreign tax credits for foreign taxes paid rather than deducting foreign taxes.

Expert Solution

a. The Korean sub pays $17.2 million in tax leaving it with $25.8 million in
earnings and profits. Using the formula, the deemed paid foreign taxes on the dividend would
be: 17.2 x ($10 million dividend/$25.8 E&P) = $6.66 million. Accordingly, the $10 million
dividend would be grossed up by the $6.66 million and $16.66 million from Korea would be
included on Hawkeye’s U.S. tax return.
The same calculation would be done for Singapore. The Singapore sub pays $1.75 million in
tax and has $5.25 million in E&P. The deemed paid foreign taxes on the $2 million dividend
would be $1.75 x ($2/$5.25) = $666,667. The $2 million dividend would be grossed up for the
$666,667 deemed paid foreign taxes and Hawkeye would include $2.667 million from
Singapore.
A faster way to calculate the grossed up foreign source income is just to divide the dividend
from each country by (1‐tax rate) as below:
$19.33 million {10/(1‐.4) + 2/(1‐.25)}.
b. $23.67 million {10/(1‐.4) + 7).
c. $19.33 million. Although the Singapore income may be Subpart F income, the
Singapore corporation is not a Controlled Foreign Corporation because it is less
than 50% owned by U.S. shareholders

ekkarill92 answered 1 year ago

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