Fleming Corporation, a U.S. multinational, has pretax U.S. source income and foreign source income as follows. $\begin{array}{lr}
\text { U.S. source income } & \$ 1,000,000 \
\text { Foreign source income-Country A } & 500,000 \
\text { Total } & \$ 1,500,000
\end{array}$ Fleming paid $50,000 income tax to CountryA. If Fleming takes the foreign tax credit, compute its worldwide tax burden as a percentage of its pretax income.

Question

Quizplus · Accepted Answer

The foreign tax credit reduces the U.S. tax liability by the amount of foreign taxes paid, up to the amount of U.S. tax on the foreign income. In this case, Fleming's U.S. tax liability is $340,000 (34% of $1,000,000), and its foreign tax credit is $50,000. Therefore, its worldwide tax burden is $290,000 (34% of $1,500,000).

Fleming Corporation, a U Fleming Paid $50,000 Income Tax to CountryA