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:

Question

Quizplus · Accepted Answer

The solution involves calculating the foreign tax credit limitation and determining the excess tax credits. The formula for foreign tax credit limitation is foreign taxable income (FTI) x U.S. tax rate / foreign tax rate. The FTI is $250,000 and the foreign tax rate is 40% and the U.S. tax rate is 21%. Therefore, foreign tax credit limitation = $250,000 x 21% / 40% = $131,250. The foreign tax liability is $100,000 and the excess tax credits = $131,250 - $100,000 = $31,250. As the excess tax credits cannot be used, they are added to the U.S. tax liability of $52,500. Therefore, the total tax liability is $52,500 + $31,250 = $83,750, which is 43.36% of the FTI. The best choice is C.

When Excess Tax Credits Go Unused, the Foreign Tax Liability