Question

a. A US corporation has an account payable to an unrelated Irish company in 90 days. The amount of the payable is €500,000. The spot exchange rate for the euro is EUR/USD 1.2131. The company’s combined federal and state income tax rate is 27.3%; the Irish corporate income tax rate is 12.5%. The company expects the exchange rate for the euro to decline to 1.2030 prior to the account’s due date. When should the company make the payment? Explain.

b. If the payee on the account is an affiliated corporation, when should the company make the payment? Explain.

c. What is the payment described in part b called? How can the company justify the amount of the payment if it is challenged by the US Internal Revenue Service or Ireland’s Revenue authority?

Answer 1

GIVEN INFORMATION:-

Account payable to an unrelated Irish company in 90 days

Amount payable = 500,000

Tax rate = 27.3%

Corporate income tax rate = 12.5% ect ..,

REQUIRED:-

a.When should the company make the payment? Explain.

b. If the payee on the account is an affiliated corporation, when should the company make the payment? Explain.

c. What is the payment described in part b called? How can the company justify the amount of the payment if it is challenged by the US Internal Revenue Service or Ireland’s Revenue authority?

SOLUTION:-

a:-

Since the dollar is valuing it is great to pay following 90 days as the equal dollar sum would be less.

Current installment = 1.2131 * 500000

= 606550

Future installment = 1.2030 * 500000

= 601500

b:-

In the event that on the off chance that it is a related organization, they should pay at the time at which net installments are less.

Current installment = 1.2131 * 500000

= 606550

Current duty funds in home nation = 27.3% * 606550

= 27.3/100 * 606550

= 0.273 *606550

= 165588.15

Current duty risk in Irish = 12.5% * 606550

= 12.5/100 *606550

= 0.125* 606550

= 75818.75

Net Payment = 606550-165588.15+75818.75

= 516780.60

Therefore NET PAYMENT is 516780.60

Future installment = 1.2030 * 500000

= 601500

Future duty funds in home nation = 27.3%* 601500

= 27.3 /100 *601500

= 0.273 *601500

= 164209.5

Future duty obligation in Irish = 12.5%* 601500

= 12.5 /100 *601500

= 0.125 *601500

= 75817.5

Net Payment = 601500-164209.5+75817.5

= 512478

Therefore net payment is 512478

"They ought to following 90 days as it were".

c:-

It is called between organization exchange. It tends to be defended by saying that it has been made according to the standard payable terms of the organization.