Eastwood Company ( A US based company) has subsidiaries in 3 countries, X, Y and Z. All three subsidiaries sell and manufacture products in their host country. Corporate income tax rates in three countries over the most current three years period 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 distant parent company. The US corporate income tax rate over this period was 35 percent.
Pretax income earned by every subsidiary and the percentage of after tax income paid to Eastwood over hte most recent three year period are as given:
Year 1 Year 2 Year 3
Subsidiary X
Pretax Income $100,000 $100,000 $100,000
Dividend (% of after tax income) 100% 50% 50%
Subsidiary Y
Pretax income $150,000 $150,000 $150,000
Dividend (% of after tax income) 50% 50% 50%
Subsidiary Z
Pretax Income $200,000 $200,000 $200,000
Dividen (% of after tax income) 40% 40% 100%
Required:
A. Evaluate the amount of foreign source income Eastwood will include in the US tax return in each of the 3 years.
B. Evaluate the amount of foreign tax credit Eastwood will be allowed to take in evaluate its US tax liabilty in each of the 3 years.
C. Evaluate the amount of excess foreign tax credit, if any, Eastwood will have in each of the three years.
D. Evaluate Eastwood's net US tax liability in each of the 3 years.