Stockholm Imports Inc., a U.S. multinational, received a $500,000 dividend from its foreign subsidiary in 2016. The subsidiary paid $112,000 foreign income tax with respect to this dividend. Stockholm's U.S. tax rate in 2016 was 34%. If Stockholm had no other foreign source income, compute its deemed paid foreign tax credit.

Question

Quizplus · Accepted Answer

The deemed paid foreign tax credit is the amount of foreign income tax paid by the subsidiary with respect to the dividend, which is $112,000. This is because the U.S. allows companies to claim a credit for foreign taxes paid on income that is repatriated to the U.S. to avoid double taxation.