Nico Mining, a U.S.-based MNC has a foreign subsidiary that earns $1,050,000 before local taxes, with all the after tax funds to be available to the parent in the form of dividends. The foreign income tax rate is 30 percent, the foreign dividend withholding tax rate is 15 percent, and the firm's U.S. tax rate is 35 percent. What are the funds available to the parent MNC if foreign taxes can be applied as a credit against the MNC's U.S. tax liability?

Question

Quizplus · Accepted Answer

First, we need to find out how much foreign tax was paid by the foreign subsidiary:
$1,050,000 x 0.30 = $315,000

Now, we need to find out how much dividend withholding tax will be paid on the remaining after tax funds:
($1,050,000 - $315,000) x 0.15 = $104,250

The funds available to the parent MNC will be:
($1,050,000 - $315,000 - $104,250) x (1 - 0.35) = $624,750