TABLE 15.1
Use the information to answer following question(s).
BayArea Designs Inc., located in Northern California, has two international subsidiaries, one located in the Ukraine, the other in Korea. Consider the information below to answer the next several questions.

-Refer to Table 15.1. If BayArea set the payout rate from the Ukraine subsidiary at 25%, how should BayArea set the payout rate of the Korean subsidiary (approximately) to more efficiently manage its total foreign tax bill?
A) 28.5%
B) 24.5%
C) 42.6%
D) 82.3%

Question

TABLE 15.1
Use the information to answer following question(s).
BayArea Designs Inc., located in Northern California, has two international subsidiaries, one located in the Ukraine, the other in Korea. Consider the information below to answer the next several questions.
 
-Refer to Table 15.1. If BayArea set the payout rate from the Ukraine subsidiary at 25%, how should BayArea set the payout rate of the Korean subsidiary (approximately) to more efficiently manage its total foreign tax bill?
A) 28.5% 
B) 24.5% 
C) 42.6% 
D) 82.3%

Quizplus · Accepted Answer

To calculate the optimum payout rate for the Korean subsidiary:

Step 1: Calculate the tax rate in Ukraine

Total foreign tax bill for Ukraine = 6,000 * 35% = $2,100

Effective tax rate in Ukraine = Total foreign tax bill/Net income in Ukraine = $2,100/($6,000*75%) = 46.67%

Step 2: Calculate the payout rate for the Korean subsidiary that results in an overall effective tax rate of 35%.

Let the payout rate for the Korean subsidiary be x.

Effective tax rate in Korea = Total foreign tax bill/Net income in Korea = $2,100/(x*Net income in Korea)

To have an overall effective tax rate of 35%, we need:

35% = (46.67% * 75% + Effective tax rate in Korea * 25%)

Solving for x, we get x = 24.5%.

TABLE 15.1 Use the Information to Answer Following Question(s)