A foreign subsidiary has $2,000,000 of taxable income, a (foreign) corporate tax rate of 25%, and a foreign dividend withholding rate of 10%. The U.S. (domestic) parent has a corporate tax rate of 30%. What are the total taxes paid by the foreign subsidiary? Assume that the foreign subsidiary is 100% owned by the U.S. parent and that all after-tax income is paid to the U.S. parent.
A) $0.00
B) $650,000
C) $500,000
D) $1,350,000

Question

Quizplus · Accepted Answer

The foreign subsidiary will pay 25% of its taxable income in foreign corporate taxes, which would be $500,000 ($2,000,000 x 25%). The remaining $1,500,000 would then potentially be subject to a foreign dividend withholding rate of 10%, resulting in $150,000 ($1,500,000 x 10%) in foreign taxes on dividends. The total taxes paid by the foreign subsidiary would be $650,000 ($500,000 + $150,000). Since the foreign subsidiary is 100% owned by the U.S. parent, all after-tax income would be paid to the U.S. parent. The U.S. parent would then be able to claim a foreign tax credit for the $650,000 in foreign taxes paid by the foreign subsidiary when reporting its own taxes.

A Foreign Subsidiary Has $2,000,000 of Taxable Income, a (Foreign)