Question

Pacific Jewel Airlines is a​ U.S.-based air freight firm with a wholly owned subsidiary in Hong Kong. The​ subsidiary, Jewel Hong​ Kong, has just completed a​ long-term planning report for the parent company in San​ Francisco,

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​, in which it has estimated the following expected earnings and payout rates for the years

2011dash–2014.

The current Hong Kong corporate tax rate on this category of income is

17.517.5​%.

Hong Kong imposes no withholding taxes on dividends remitted to U.S. investors​ (per the Hong

Konglong dash—United

States bilateral tax​ treaty). The U.S. corporate income tax rate is

3939​%.

The parent company wants to repatriate

8585​%

of net income as dividends annually.a. Calculate the net income available for distribution by the Hong Kong subsidiary for the years

2011dash–2014.

b. What is the expected amount of the dividend to be remitted to the U.S. parent each​ year?

c. After estimating the theoretical U.S. tax liability on the expected dividend​ (what is often termed​ gross-up in the​ U.S.), what is the total dividend after​ tax, including all Hong Kong and U.S.​ taxes, expected each​ year?

d. What is the effective tax rate on this​ foreign-sourced income per​ year?

a. Calculate the net income available for distribution by the Hong Kong subsidiary for the years

2011dash–2014

in the following table. ​ (Round to the nearest​ dollar.)

Jewel Hong Kong Income Items (millions US$)		2011		2012		2013		2014
Earnings before interest and taxes (EBIT)	$	6,000	$	8,000	$	10,000	$	12,000
Less interest expenses		(600)		(800)		(1,000)		(1,200)
Earnings before taxes (EBT)	$	5,400	$	7,200	$	9,000	$	10,800
Less Hong Kong corporate income taxes
Net income	$		$		$		$

Answer 1