1. U.S. tax law contains a two-pronged system for taxing the U.S.-source income of foreign persons. Briefly explain this system.
2. Assume you are on the staff of a U.S. Senator from your home state. The Senator is interested in reforming the U.S. tax system, and has asked you for your opinion of the current system for taxing the foreign operations of U.S. companies, as well as potential alternative systems for taxing such income. The Senator is particularly interested in the relative effects of these different systems on U.S. tax revenues and the competitiveness of U.S. companies in foreign markets.
Prepare a one to two-page memorandum that you could use to brief the Senator on these issues.
3. USAco is a domestic corporation that manufactures products in the U.S. for distribution in the U.S. and abroad. During the current year, USAco derives a pre-tax profit of $10 million, which includes $1 million of foreign-source income derived from a country X sales office that is considered an unincorporated branch for U.S. tax purposes. The country X corporate income tax rate is 50% and the U.S. tax rate is 35%.
a. What would be the worldwide effective tax rate on the $1 million of foreign profits, assuming the U.S. taxes the worldwide income of domestic corporations, but allows an unlimited credit for foreign income taxes?
b. What would be the worldwide effective tax rate on the $1 million of foreign profits, assuming the U.S. allows a credit for foreign income taxes, but the credit is limited to the U.S. tax attributable to foreign-source income?
c. What would your answer to part (b) change if the foreign tax rate was 30% rather than 50%?