Assume that a U.S. company has a subsidiary in the United Kingdom that earned $100,000 (translated from pounds to dollars) in 1996 at a tax rate of 40 percent. The tax rate in the United States is 34 percent, and the withholding tax rate on dividends is 5 percent. If the subsidiary does not declare a dividend, how much of its income is included in U.S. taxable income?

Question

Quizplus · Accepted Answer

Since the subsidiary did not declare a dividend, none of its earnings are included in the U.S. taxable income. Even though the subsidiary earned income in the U.K., it is not subject to U.S. taxes until the profits are repatriated back to the U.S. in the form of dividends. Therefore, the correct answer is D: nothing.

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