Question

Martin Inc., a U.S. multinational, began operations in 2016. Martin had pretax U.S. source income and foreign source income as follows:

Income earned in the US            $900,000

Income earned in Country E 200,000

   Total global income                   $1,100,000

  

Martin paid $135,000 income tax to Country E.

Compute the amount that Martin would owe the U.S. Federal government for 2016 if it takes the foreign tax credit.

Assume that Martin's U.S. tax rate is 37% for 2016.

* make sure you read LO 13-5 before answering this question.

		$272,000
		$333,000
		$407,000
		$398,000

Answer 1

As given in the question, the Total Global Income is computed as $1,100,000 (that is $ 900,000 income earned in US and $ 200,000 earned in country E)

Income tax to Country E = $ 135,000

Effective Rate of Income Tax paid by Martin in Country E = 67.5% (that is $ 135,000/$200,000 WHICH is calculated by dividing the Income Tax paid in Country E with Income earned in country E)

(A) Incometax to be paid to U.S. Federal government = $ 333,000 (that is Income earned in country US Multiplied by income tax rate in US country)(i.e. $ 900,000 * 37%)

Income tax credit available on payment of income tax to Foreign Country.

That will be 30.5% (67.5% already paid in Country E less 37% paid in domestic country US)

(B) credit available will be $61,000 that is $ 200,000*30.5%

Total amount that would Martin owe the Federal government for 2016 if it takes the foreign tax credit will be $ 272,000 (that is $ 333,000 less $ 61,000 ) (amount of income tax paid in US less Foreign tax Credit to be available )