Question

?Avon's Foreign-Source Income. Avon is a? U.S.-based direct seller of a wide array of products. Avon markets leading? beauty, fashion, and home products in more than 100 countries. As part of the training in its corporate treasury? offices, it has its interns build a spreadsheet analysis of the following hypothetical subsidiary? earnings/distribution analysis. Use the tax analysis presented in the table below for your basic? structure.

a. What is the total tax? payment, foreign and domestic? combined, for this? income?

b. What is the effective tax rate paid on this income by the? U.S.-based parent? company?

c. What would be the total tax payment and effective tax rate if the foreign corporate tax rate was 45% and there were no withholding taxes on? dividends?

d. What would be the total tax payment and effective tax rate if the income was earned by a branch of the U.S.? corporation?

	Case 1	Case 2
a     Foreign corporate income tax rate	28%	45%
b     U.S. corporate income tax rate	35%	35%
c     Foreign dividend withholding tax rate	15%	0%
d     U.S. ownership in foreign firm	100%	100%
e     Dividend payout rate of foreign firm	100%	100%
Foreign Subsidiary Tax Computation
1     Taxable income of foreign subsidiary	$3,400,000	$3,400,000
2     Foreign corporate income tax	(952,000)	(1,530,000)
3     Net income available for distribution	$2,448,000	$1,870,000
4     Retained earnings	0	0
5     Distributed earnings	2448000	1870000
6     Distribution to U.S. parent company	2448000	1870000
7     Withholding taxes on dividends	367200	0
8     Net remittance to U.S. parent	$2,080,800	$1,870,000
U.S. Corporate Tax Computation on Foreign Income
9     Dividend received before withholding	$2,448,000	$1,870,000
10   Add back foreign deem-paid tax	952000	1530000
11   Grossed-up foreign dividend	$3,400,000	$3,400,000
12   Tentative U.S. liability	1190000	1190000
13   Less credit for foreign taxes
a foreign income taxes paid	(952,000)	(1,530,000)
b foreign withholding taxes paid	(367,200)	(0)
c total	($1,319,200)	($1,530,000)
14   Additional U.S. taxes due	$0	$0
15   Excess foreign tax credits	129200	340000
16   After-tax income from foreign subsidiary	$2,210,000	$2,210,000

Please provide very detailed answers to all the questions asked!

Answer 1

I was able to complete only first three parts owing to the research I had to do to understand the topic and provide answer to each part within the available time.

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Part a)

The total amount of tax payment (both foriegn and domestic) is calculated as below:

Domestic Tax Payment = $1,190,000

Foreign Tax Payment = Foreign Income Taxes Paid + Foreign Withholding Taxes Paid = 952,000 + 367,200 = $1,319,200

Total Tax Payment = Domestic Tax Payment + Foreign Tax Payment - Credit for Foreign Tax Payment + Excess Foreign Tax Credits = 1,190,000 + 1,319,200 - 1,319,200 + 129,200 = $1,319,200

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Part b)

The effective tax rate paid is determined as below:

Effective Tax Rate = Total Tax Payment/3,400,000*100 = 1,319,200/3,400,000*100 = 38.8%

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Part c)

The value of total tax payment and effective tax rate is arrived as below:

Total Tax Payment = Domestic Tax Payment + Foreign Tax Payment - Credit for Foreign Tax Payment + Excess Foreign Tax Credits = 1,190,000 + 1,530,000 - 1,530,000 + 340,000 = $1,530,000

Effective Tax Rate = Total Tax Payment/3,400,000*100 = 1,530,000/3,400,000*100 = 45%