Questions -
Q1. Wheelco, a foreign corporation, manufactures motorcycles for sale worldwide. Wheelco markets its motorcycles in the United States through Wheely, a wholly-owned U.S. marketing subsidiary that derives all of its income from U.S. business operations. Wheelco also has a creditor interest in Wheely, such that Wheely's debt to equity ratio is 3 to 1, and Wheely makes annual interest payments of $60 million to Wheelco. The results from Wheely's first year of operations are as follows:
Sales - $180 million
Interest income - $6 million
Interest expense (paid to Wheelco) - $6 million
Depreciation expense - ($30 million)
Other operating expenses - ($81 million)
Pre-tax income - $15 million
Assume the U.S. corporate tax rate is 35%, and that the applicable tax treaty exempts Wheelco's interest income from U.S. withholding tax. Compute Wheely's interest expense deduction.
Q2. USAco, a domestic corporation, is the wholly-owned U.S. subsidiary of FORco, a foreign corporation. The U.S.-Country F tax treaty exempts interest payments from withholding taxes. USAco's financial statements appear as follows:
BALANCE SHEET
Assets Liabilities & Owners' Equity
Cash $100
Receivables $500
Notes Payable $400
Owner's Equity $200
INCOME STATEMENT
Gross Income $500
Administrative Expenses $350
Interest Expense $100
The interest expense of $100 arises from a notes payable from USAco to FORco.
What is the maximum amount of interest USAco may deduct on its U.S. return?