Question

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 140 million Ethiopian birrs. The current exchange rate is 9.6046 birrs/dollar or S=$0.1041/birr.

The Ethiopian tax rate on this activity is 21%. 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 39%.

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 Ethiopiansubsidiary?

Tailor Johnson's U.S. tax liability on its Ethiopian subsidiary is $___million.  (Round to two decimal places.)

Answer 1

Steps Followed:

1. Using the given exchange rate, convert EBIT into Dollars.
2. Calculate 21% tax to be paid in Ethioia and 39% tax to be paid in U.S.
3. However, considering the tax credit scenario, we would convert the amount of Ethiopian tax paid into dollars.
4. That would be the amount of tax credit we would receive, according to the U.S Tax law stated in the question.
5. Subtract the Tax credit from the total tax due (39%) to U.S to receive the net tax liability.

Final answer U.S Tax Liability on its Ethiopian subsidiary is $2.62 million

Please find the screenshot below for all the calculations: