Assume that U.S.MNE A earns $100,000 of foreign source income, that the tax rate in the foreign country is 40 percent, and that the tax rate in the United States is 35 percent.How much total (both domestic and foreign)tax would the company pay on that foreign source income, assuming that the tax credit principle applies?
A)$40,000
B)$35,000
C)$75,000
D)$5,000

Question

Quizplus · Accepted Answer

The company would first pay $40,000 in the foreign country (40% of $100,000). Under the tax credit principle, this amount can be credited against the taxes owed in the United States. Since the U.S. tax rate is 35% (which would amount to $35,000 on $100,000), the company's U.S. tax liability would be fully covered by the $40,000 already paid abroad, resulting in no additional tax owed to the U.S. Thus, the total tax paid on the foreign source income is $40,000.

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