What is Tailor Johnson's U.S. tax liability on its Ethiopian subsidiary?

incorrect,P31-9 (similar to) Tailor Johnson, a U.S. maker of fine menswear, has a subsidiary in Ethiopia. This year, the subsidiary reported and repatriated earnings before interest and taxes (EBIT) of 219 million Ethiopian birrs. The current exchange rate is 7.8929 birrs/dollar or Upper S equals $ 0.1267 divided by birr. The Ethiopian tax rate on this activity is 25 %. U.S. tax law requires Tailor Johnson to pay taxes on the Ethiopian earnings at the same rate as on profits earned in the United States, which is currently 36 %. However, the United States gives a full tax credit for foreign taxes paid up to the amount of the U.S. tax liability. What is Tailor Johnson's U.S. tax liability on its Ethiopian subsidiary?

Expert Solution

Tax in Ethiopia (paid) = 219 million * 25%

= 54.75 million Ethiopian birrs

Tax in Ethiopia paid ( in US $ ) = 54.75 million * 0.1267

= $ 6,936,825

Gross tax liability in US

( 219,000,000 * 0.1267 * 36% )

$ 9,989,028

Less : Tax credit for foreign taxes paid

$ 6,936,825

Tailor Johnson's U.S. tax liability

$ 3,052,203

jeff jeffy answered 2 years ago

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