MedTec was incorporated five years ago in Georgia. It manufactures products for doctors and hospitals in the United States. Because of lower labor costs outside the United States, MedTec establishes in Country X a foreign subsidiary that will manufacture some of its products for shipment to the United States and to foreign countries. Country X tax rates are lower than U.S. tax rates. In addition, Country X has provided special tax incentives that lead you to believe the subsidiary will pay local income taxes at a 10% rate for the first five years, and at a 25% rate for subsequent years. Only a small portion, if any, of the foreign earnings will be taxed to MedTec under Subpart F. According to financial projections, the foreign subsidiary will generate $500,000 of pre-tax profits each year. Because of MedTec's need for capital to expand its foreign operations, none of the foreign profits will be repatriated to the United States in the first ten years of operations.
Prepare a memorandum that outlines the proper financial accounting treatment of MedTec's U.S. income taxes with respect to its investment in the Country X subsidiary.
A partial list of research sources is:
• Accounting Standards Codification (ASC) 740 (Income Taxes) formerly SFAS No. 109
• IRC Sec. 951