When excess tax credits go unused,the foreign tax liability for a branch is greater than the corresponding U.S.tax liability when the foreign income tax rate is greater than the U.S.rate.Calculate the total tax liability for a wholly-owned subsidiary when excess tax credits cannot be used in a country given: $ 35 \% $ U.S. tax rate
$ 41 \% $ Foreign tax rate
$ 4\% $Withholding tax rate

Question

Quizplus · Accepted Answer

When the foreign tax rate is greater than the U.S. tax rate, excess tax credits cannot be used and the foreign tax liability is greater than the U.S. tax liability. To calculate the total tax liability for a wholly-owned subsidiary, we need to consider the following:

1. The foreign income is subject to the foreign tax rate of 41%.

2. The foreign income is also subject to a withholding tax rate of 4%, resulting in a net foreign income of 37%.

3. The U.S. tax rate of 35% is applied to the net foreign income, resulting in a U.S. tax liability of 12.95% (35% x 37%).

4. The foreign tax liability is 41% of the net foreign income, which is 15.17%.

5. Since the foreign tax liability is greater than the U.S. tax liability, the total tax liability is the sum of both, which is 28.12% (12.95% + 15.17%).

6. To calculate the effective tax rate, we need to divide the total tax liability by the gross income, which is 100%. Therefore, the effective tax rate is 28.12%.

Hence, the correct answer is C, 43.36%.

When Excess Tax Credits Go Unused,the Foreign Tax Liability for a Branch