FORco, a foreign corporation, operates a U.S. branch that derives all of its income from U.S....

FORco, a foreign corporation, operates a U.S. branch that derives all of its income from U.S. business operations. During its first year of operations, the branch has $20 million of income effectively connected to the U.S. operations and distributes all of its after-tax earnings to FORco. Assume no change in U.S. net equity during the year, a U.S. corporate tax rate of 21%, and a U.S. withholding rate for U.S.-source dividends is 5%. Assume the applicable treaty provides a rate reduction for the branch profits tax to 4%. How much is the total U.S. tax burden on the U.S. source earnings?

Question 8 options:

1)	$4,200,000

2)	$4,832,000

3)	$4,990,000

4)

$0

Expert Solution

2) $4,832,000

Calculation:

Particulars	Rate	Formula	Amount
Branch Income from U.S. operations (a)	-	-	2,00,00,000
Corporate Tax in U.S. (b)	21%	(2,00,00,000 X 21%)	42,00,000
Net Income available for distribution (treated as Dividend for the purpose of taxation) (c)	-	(2,00,00,000 - 42,00,000)	1,58,00,000
Withholding tax on Dividend (as mentioned in point c) = d	4% (Since, there is a treaty which has reduced the rate to 4%)	(1,58,00,000 X 4%)	6,32,000
Total tax burden in U.S. (b + d)	-	(42,00,000 + 6,32,000)	48,32,000

ekkarill92 answered 1 year ago

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