Lunar Inc. (“Lunar”), a U.S. corporation, is engaged in manufacturing widgets in Country F through a branch located there. Under its contract with the government of Country F, Lunar must pay tax to Country F equal to the greater of (i) $100 per item produced or (ii) the maximum amount creditable by Lunar against its U.S. tax liability for that year with respect to income from its operations in Country F. Lunar is exempted from Country F’s otherwise generally imposed income tax. Lunar produces 500 widgets during the tax year and the maximum amount creditable by Lunar against its U.S. tax liability for the year is $75,000.
(a) If Lunar had been subject to Country F’s generally imposed income tax, it would have paid a tax to Country F of $40,000. How much, if any, of the $75,000 tax paid by Lunar to Country F will be creditable?
(b) How would the results in part (a) differ if Lunar had produced 1,000 widgets (and, thus, had to pay Country F a tax of $100,000 ($100 multiplied by the 1,000 widgets produced) because that amount exceeded the $75,000 maximum amount creditable by Lunar against its U.S. tax liability for the year)?
(c) How would the results in part (a) differ if Lunar would have paid $80,000 in tax to Country F if it had been subject to the generally imposed income tax?