When excess tax credits go unused,the foreign tax liability for a branch is greater than the corresponding U.S.tax liability when the foreign income tax rate is greater than the U.S.rate.Calculate the total tax liability for a wholly-owned subsidiary when excess tax credits cannot be used in a country given: $35 \%$ U.S. tax rate
$41 \%$ Foreign tax rate
$4 \%$ Withholding tax rate

Question

Quizplus · Accepted Answer

We can use the formula to calculate the total tax liability:

Total Tax Liability = (Foreign Income × Foreign Tax Rate) + [(Foreign Income × U.S. Tax Rate) - (Foreign Income × Foreign Tax Rate)] × (1 - Withholding Tax Rate)

Let us assume the foreign income to be $100.

Foreign tax liability = $100 × 41% = $41

U.S. tax liability = $100 × 35% = $35

Excess tax credits = $41 - $35 = $6

As the excess tax credit cannot be used, we need to calculate the total tax liability without taking it into consideration.

Total Tax Liability = $41 + [($100 × 35%) - ($100 × 41%)] × (1 - 4%)

Total Tax Liability = $43.36

Hence, the answer is C.

When Excess Tax Credits Go Unused,the Foreign Tax Liability for a Branch