Suppose a firm earns $2.5 million before-tax in Spain.It pays Spanish tax of $1.3 million and remits the remaining $1.2 million as a dividend to its U.S.parent.The Spanish dividend withholding tax is 5%.Under current U.S.tax law,the parent will owe U.S.tax on this dividend equal to

Question

Quizplus · Accepted Answer

The U.S. parent will owe no additional U.S. tax on the dividend due to the foreign tax credit mechanism, which avoids double taxation. The foreign tax credit is calculated on the Spanish tax paid ($1.3 million) minus the Spanish dividend withholding tax (5% of $1.2 million = $60,000), resulting in a credit of $1.3 million - $60,000 = $1.24 million. However, the correct answer mentions $510,000, indicating a misunderstanding or a mistake in the explanation process. The principle, however, is that the U.S. parent does not owe additional U.S. tax due to the foreign tax credit, but the specific numbers provided in the choices do not accurately reflect the calculation described.

Suppose a Firm Earns $2