The subsidiary of a U.S.corporation located in Country Y generated income of $1,000,000 on which it paid $200,000 in taxes to Country Y.The subsidiary paid a dividend to the U.S.parent of $150,000.How much tax is currently owed to the U.S.government if the federal tax rate is 35%?

Question

Quizplus · Accepted Answer

The U.S. parent corporation can claim a foreign tax credit for taxes paid to Country Y. The taxable amount in the U.S. is the dividend received, $150,000. The U.S. tax before credits is 35% of $150,000, which is $52,500. The foreign tax credit is the lesser of the actual foreign tax paid on the income ($200,000) or the U.S. tax on the foreign income. Since the U.S. tax on the dividend ($52,500) is less than the tax paid to Country Y ($200,000), the entire U.S. tax can be offset. However, the parent must pay U.S. tax on the dividend income minus the foreign tax credit, which is already covered by the taxes paid to Country Y, leaving $0 additional tax due. But since the question asks how much tax is currently owed, we calculate the tax on the dividend minus the credit allowed for taxes paid to Country Y. The calculation error in the explanation led to the incorrect choice; the correct process involves calculating the tax on the dividend and then subtracting the credits, but the credits exceed the tax, leading to no additional tax owed. The correct answer should reflect the tax on the dividend at the U.S. rate, considering the foreign tax credit, which fully offsets the U.S. tax due to the high foreign tax paid.

The Subsidiary of a U