Benik Industries generated $2 million of income from domestic operations and an additional $700,000 from its only foreign subsidiary. Its tax rate is 30 percent on domestic income and 35 percent on foreign income. If Benik's home country observes the capital export neutrality approach to taxation, what net dividend will Benik receive from its subsidiary?

Question

Quizplus · Accepted Answer

Under the capital export neutrality approach, the foreign income is taxed at the domestic rate if the domestic rate is higher. Here, the domestic rate (30%) is lower than the foreign rate (35%), so the foreign income is taxed at the 35% rate. The foreign subsidiary's income is $700,000, and at a 35% tax rate, the taxes paid would be $700,000 * 35% = $245,000. Therefore, the net dividend is $700,000 - $245,000 = $455,000.

Benik Industries Generated $2 Million of Income from Domestic Operations