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 declares a 100% dividend, what is the maximum allowable tax credit according to U.S. tax law?

Question

Quizplus · Accepted Answer

The maximum allowable tax credit is the amount of U.S. tax that would be paid on the foreign income, which is 34% of $100,000, or $34,000. This ensures that the total tax paid (foreign plus U.S.) does not exceed the U.S. tax rate on the foreign income.

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