Question

International Taxation Question

Tenco, a domestic corporation, manufactures tennis rackets for sale in the United States and abroad. Tenco owns 100% of the stock of Teny, a foreign sales subsidiary that was organized in Year 1. During Year 1, Teny had $15 million of foreign base company sales income, paid $1 million in foreign income taxes, and distributed no dividends. During Year 2, Teny had no earnings and profits, paid no foreign income taxes, and distributed a $14 million dividend.

Assuming the U.S. corporate tax rate is 21%, what are the U.S. tax consequences of Teny’s Year 1 and Year 2 activities?

Answer 1

Answer:

Given that:

Tenco owns 100% of the stock of Teny, a foreign sales subsidiary that was organized in Year 1.

As Tenco is being US shareholder of controlled foreign corporations (CFC) have to include in its gross income deemed dividend equal to pro-rata share of its income

Tenco being 100% owner of CFC can claim a deemed paid foreign tax credit equal to the amount of Teny's  foreign income taxes.

U.S. tax consequences of Teny’s Year 1:

Income to be included = $15 million

US tax at 21% = 15 * 21% = $3.15 Million

Less: Foreign tax credit = $1 million

US Tax payable = 3.15 - 1 = $2.15 million.

Tax payable in US = $2.15 Million

U.S. tax consequences of Teny’s Year 2:

During Year 2, Teny had no earnings and profits, paid no foreign income taxes, and distributed a $14 million dividend.

The 14 million dividend distrubuted in year 2 represents distribution of previously taxed Subpart F income,

In Year 2, Tenco can exclude the $14 million dividend from U.S. taxation