Question

Peripatetic? Enterprises, a U.S.? import-export trading? firm, is considering its international tax situation. Tax law in the United States requires U.S. corporations to pay taxes on their foreign earnings at the same rate as profits earned in the United? States; this rate is currently 47 % ?However, a full tax credit is given for the foreign taxes paid up to the amount of the U.S. tax liability. Peripatetic has major operations in? Poland, where the tax rate is 15%?, and in? Sweden, where the tax rate is 58%. The? profits, which are fully and immediately?repatriated, and foreign taxes paid for the current year are shown? here:

	Poland	Sweden
Earnings before interest and taxes	?$81 million	?$97 million
Host country taxes paid	?$12.15 million	?$56.26 million
Earnings before interest and after taxes	?$68.85 million	?$40.74 million

a. What is the U.S. tax liability on the earnings from the Polish subsidiary assuming the Swedish subsidiary did not? exist?

b. What is the U.S. tax liability on the earnings from the Swedish subsidiary assuming the Polish subsidiary did not? exist?

c. Under U.S. tax? law, Peripatetic is able to pool the earnings from its operations in Poland and Sweden when computing its U.S. tax liability on foreign earnings. Total EBIT is thus ?$178 million and the total host country taxes paid are ?$68.41 million. What is the total U.S. tax liability on foreign? earnings? Show how this relates to the answers in parts ?(a?) and (b?).

Answer 1

a.	Polish subsidiary -
	EBIT =		81
	Tax @ 47% =		38.07
Less ;	Tax credit =		12.15
	Tax Liability =		25.92
b.	Swedish Subsidiary -
	EBIT =		97
	Tax @ 47% =		45.59
Less ;	Tax credit =	56.26 but credit is available maximum upto total tax payable	45.59
	Tax Liability =		0
c.	Total EBIT		178
	Tax @ 47% =		83.66
Less ;	Tax credit =		68.41
	Tax Liability =		15.25
	If credit is taken assuming individual subsidiary then the credit from swedish will lapse in excess of 45.59(i.e.10.67) on the other hand we will have to pay tax liability in excess of 12.15 (i.e. 25.92)
	Whereas assuming them as one subsidiary will allow us to net the tax liability and its credit and hence result in lower tax liability.