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Sombrero Corporation, a U.S. corporation, operates through a branch in Espania. Management projects that the company’s pretax income in the next taxable year will be $117,200: $90,800 from U.S. operations and $26,400 from the Espania branch. Espania taxes corporate income at a rate of 30 percent.

b. Management plans to establish a second branch in Italia. Italia taxes corporate income at a rate of 10 percent. What amount of income will the branch in Italia have to generate to eliminate the excess credit generated by the branch in Espania? (Do not round intermediate calculations. Round your final answer to the nearest whole dollar amount.)

Answer 1

Solution :

a)
Taxable Income ($117,200 X 20%)	23,440
Foreign (Espania Tax) ($26400 X 30%)	7,920
FTC Limitation {(26400 / 117200) X 23440}	5,280
Excess FTC	2,640
** Assume US Tax rate to be 20%
(b)
Each dollar of Taxable Income Generated in Italia
Excess FTC (20% - 10%)	10%
Excess FTC	2,640
Income generated from Italia (2640 / 10%)	26,400
Foreign Income Tax
Foreign (Espania Tax) ($26400 X 30%)	7,920
Italia (26400 X 10%)	2,640
Total Foreign Tax	10,560
FTC Limitation
Foreign Source Taxable Income
Espania	26,400
Italia	26,400
Total	52,800
Total Taxable Income - (90800 + 52800)	143,600
US Credit @ 20%	28,720
FTC Limitation - (52800 / 143600) X 28720	10,560
Excess FTC (10560-10560)	-