Fleming Corporation, a U.S. multinational, has pretax U.S. source income and foreign source income as follows. Fleming paid $50,000 income tax to Country A. If Fleming takes the foreign tax credit, compute its worldwide tax burden as a percentage of its pretax income.

Question

Fleming Corporation, a U.S. multinational, has pretax U.S. source income and foreign source income as follows.  Fleming paid $50,000 income tax to Country A. If Fleming takes the foreign tax credit, compute its worldwide tax burden as a percentage of its pretax income.

Quizplus · Accepted Answer

First, we must calculate Fleming's foreign tax credit limit. This is done by multiplying its foreign income by the U.S. tax rate and comparing it to the actual foreign tax paid.

Foreign tax credit limit = (10,000 x 0.21) = 2,100

Actual foreign tax paid = 50,000

Since the actual foreign tax paid is above the foreign tax credit limit, Fleming can claim the entire 50,000 as a foreign tax credit.

Now we can calculate Fleming's worldwide taxable income, taking into account the foreign tax credit.

U.S. source income = 50,000
Foreign source income = 10,000

Taxable income = 50,000 + 10,000 - 50,000 = 10,000

Therefore, Fleming's worldwide tax burden is (50,000 + 50,000 - 50,000 - 50,000 + 10,000)/50,000 = 34%.

Therefore, the best choice is A, with an explanation as outlined above.