Analysis
Answer the question provided in Exercise 7 on pages 489-490 of the textbook.
In addition, explain the availability and eligibility of the foreign tax credit. How is the foreign tax credit calculated? Analyze the foreign and U.S. taxes paid by Alubar on each foreign source of income. Recommend methods that Alubar can adopt to maximize its net income.
Alubar, a U. S. multinational, receives royalties from Country A, foreign branch earnings from Country B, and dividends equal to 50 percent of net income from subsidiaries in Countries C and D. There is a 10 percent withholding tax on the royalty from Country A and a 10 percent withholding tax on the dividend from Country C. Income tax rates are 20 percent in Country B and 40 percent in Country C. Country D assesses indirect taxes of 40 percent instead of direct taxes on income. Selected data are as follows:
Country A Country B Country C Country D
Royalty from Country A operations $10
Pretax income $45 $45 $27
Income taxes(20%/40%) 9 18 -0-
Net income $36 $27 $27
Required: Calculate the foreign and U. S. taxes paid on each foreign source income.