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. allows a foreign tax credit for taxes paid to other countries. The subsidiary paid $200,000 in taxes on $1,000,000 income, which is a 20% tax rate. The U.S. tax rate is 35%, so the U.S. parent would owe 15% on the $150,000 dividend, which is $22,500. However, since the foreign tax credit exceeds this amount, no additional U.S. tax is owed.

The Subsidiary of a U