A Japanese branch of a U.S. corporation paid $4,200,000 in taxes to the government of Japan on income it generated there. The corporation is subject to a 35% tax rate in the U.S. How much foreign tax credit can be taken in calculating the taxes owed to the U.S. on $10,000,000 of Japanese branch income?

Question

Quizplus · Accepted Answer

The foreign tax credit is limited to the amount of tax paid to the foreign country or the U.S. tax liability on the foreign income, whichever is less. In this case, the Japanese branch paid $4,200,000 in taxes to Japan, so that amount can be used as a foreign tax credit. However, the U.S. tax liability on $10,000,000 of income at a 35% tax rate would be $3,500,000, which is less than the $4,200,000 foreign taxes paid. Therefore, the maximum foreign tax credit that can be taken is $3,500,000.

A Japanese Branch of a U