Fleming Corporation, a U.S. multinational, has pretax U.S. source income and foreign source income as follows: $\begin{array}{lr}
\text {U.S. source income }&\$1,000,000\
\text {Foreign source income-country A }&500,000\
\text {Total }&\$1,500,000\
\end{array}$
Fleming paid $200,000 income tax to Country A. Assume Fleming's foreign source income does not qualify as foreign-derived intangible income. If Fleming takes the foreign tax credit, compute its worldwide tax burden as a percentage of its pretax income.

Question

Fleming Corporation, a U.S. multinational, has pretax U.S. source income and foreign source income as follows: $\begin{array}{lr}
\text {U.S. source income }&\$1,000,000\
\text {Foreign source income-country A }&500,000\
\text {Total }&\$1,500,000\
\end{array}$
 Fleming paid $200,000 income tax to Country A. Assume Fleming's foreign source income does not qualify as foreign-derived intangible income. If Fleming takes the foreign tax credit, compute its worldwide tax burden as a percentage of its pretax income.

Quizplus · Accepted Answer

Fleming's worldwide tax burden as a percentage of its pretax income can be calculated by first determining the U.S. tax liability, then subtracting the foreign tax credit, and finally dividing the net U.S. tax liability by the total pretax income. Assuming the U.S. corporate tax rate is 21% (as no rate is provided, we use the current standard rate), the calculation is as follows:1. Calculate U.S. tax on worldwide income: 21% of $1,500,000 = $315,000.2. Subtract the foreign tax credit (the $200,000 paid to Country A): $315,000 - $200,000 = $115,000.3. Add the foreign tax paid to the net U.S. tax liability to get the total tax burden: $115,000 + $200,000 = $315,000.4. Divide the total tax burden by the total pretax income: $315,000 / $1,500,000 = 21%.However, this calculation does not account for the fact that the foreign tax credit reduces the U.S. tax liability directly. The correct approach is to consider the U.S. tax liability before the foreign tax credit and then subtract the credit. Since the question implies that the calculation provided was incorrect and aimed at finding the worldwide tax burden including the foreign tax paid, the correct calculation should reflect the total tax paid (both U.S. and foreign) as a percentage of worldwide income, which was not accurately represented in the initial explanation.Given the data and the error in the initial explanation, the correct calculation directly addressing the worldwide tax burden, including both U.S. and foreign taxes as a percentage of total income, wasn't provided. The correct approach involves recognizing that the total tax paid (U.S. and foreign) relative to the worldwide income is what defines the worldwide tax burden percentage. Without the explicit U.S. tax calculation after the foreign tax credit application, the provided steps lead to a misunderstanding of the tax burden calculation.

Fleming Corporation, a U Fleming Paid $200,000 Income Tax to Country A