The subsidiary of a U.S. corporation located in Country Y generated income of $1,000,000 on which it paid $400,000 (40%) in taxes to Country Y. The subsidiary paid a dividend to the U.S. parent of $54,000. 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. allows for a foreign tax credit to avoid double taxation on income earned abroad. Since the subsidiary already paid $400,000 in taxes to Country Y, which is more than what would have been owed in the U.S. (35% of $1,000,000 = $350,000), no additional tax is owed to the U.S. government on this income.

The Subsidiary of a U