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 195 million Ethiopian birrs. The current exchange rate is 9.8039 ​birrs/dollar or Upper S equals $ 0.1020 divided by birrS=$0.1020/birr. The Ethiopian tax rate on this activity is 27%. 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 43%. ​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?

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

Answer 1

Answer :

Tax in Ethiopia (paid) = 195,000,000 * 27%

= 52,650,000 million Ethiopian birrs

Tax in Ethiopia (paid) (in US $) = 52,650,000 * 0.1020

= 5,370,300

Gross Tax Liability in US = 195,000,000 * 0.1020 * 43%

= $8,552,700

Less : Tax credit for foreign taxes paid = $5,370,300

Tailor Johnson's US tax liability = $3,182,400.