Eastwood Company (a U.S.-based company) has subsidiaries in three coun- tries: X, Y, and Z. All three subsidiaries manufacture and sell products in their host country. Corporate income tax rates in these three countries over the most recent three-year period are as follows:
Country Year 1 Year 2 Year 3
X . . . . . . . . . . . 50% 50% 40%
Y . . . . . . . . . . . 25 25 25
Z . . . . . . . . . . . 36 30 30
None of these countries imposes a withholding tax on dividends distributed to a foreign parent company. The U.S. corporate income tax rate over this period was 35 percent.
Pretax income earned by each subsidiary and the percentage of after-tax income paid to Eastwood over the most recent three-year period are as follows
Year1 year 2 year 3
Subsidiary X
Pretax income . . . . . . . . . . . . . . . . . $100000 $100000 $100000
Dividend (% of after-tax income) . . . %100 %50 %50
Subsidiary Y Pretax income . . . . . . . . . . . . $150000 $150000 $150000
Dividend (% of after-tax income) . . . %50 %50 %50
Subsidiary Z
Pretax income . . . . . . . . . . $200000 $200000 $200000
Dividend (% of after-tax income) . . %40 %40 %100
Required
a. Determine the amount of foreign source income Eastwood will include in its U.S. tax return in each of the three years.
b. Determine the amount of foreign tax credit Eastwood will be allowed to take in determining its U.S. tax liability in each of the three years.
c. Determine the amount of excess foreign tax credit, if any, Eastwood will have in each of the three years.
d. Determine Eastwood's net U.S. tax liability in each of the three years.