The corporate income tax rates in two countries, A and B, are 40 percent and 25 percent, respectively. Additionally, both countries impose a 30 percent withholding tax on dividends paid to foreign investors.
However, a bilateral tax treaty between A and B reduces the withholding tax to 10 percent if the dividend is paid to an investor that owns more than 50 percent of the paying company's stock (parent). Both A and B use a worldwide approach to taxation but allow taxpayers to take a foreign tax credit for income taxes paid on foreign earned income.
The credit is limited to the amount of tax that would have been paid in the domestic country on that income.
Both countries use the same currency, so foreign currency translation is not required.
Part 1.
Albemarle Company is headquartered in Country A and has a wholly owned subsidiary in Country B. In the current year, Albemarle's foreign subsidiary generated before tax income of 100,000 and remitted 50 percent of its net income to the parent company as a dividend.
Required:
a. Determine the amount of taxes paid in Country A.
b. Determine the amount of taxes paid in Country B
Part 2.
Bostwick Company is headquartered in Country B and has a wholly owned subsidiary in Country A. In the current year, Bostwick's foreign subsidiary generated before tax income of 100,000 and remitted 50 percent of its net income to the parent company as a dividend.
Required:
a. Determine the amount of taxes paid in Country A.
b. Determine the amount of taxes paid in Country B.