2. Discovery Bay Airlines (Hong Kong). Discovery Bay Airlines is a US-based air freight firm with a wholly owned subsidiary in Hong Kong. The sub- sidiary, DBay-Hong Kong, has just completed a long- term planning report for the parent company in San Francisco, in which it has estimated the following expected earnings and payout rates for the years 2004-2007. The current Hong Kong corporate tax rate on this category of income is 16.5%. Hong Kong imposes no withholding taxes on dividends remitted to U.S. investors (per the Hong Kong-United States bilat- eral tax treaty). The U.S. corporate income tax rate is 35%. The parent company wants to repatriate 75% of net income as dividends annually.

a. Calculate the net income available for distribu- tion by the Hong Kong subsidiary for the years 2004-2007.

b. What is the amount of the dividend expected to be remitted to the US. parent each year?

c. After gross-up for U.S. tax liability purposes, what is the total dividend after tax (all Hong Kong and U.S. taxes) expected each year?

d. What is the effective tax rate on this foreign- sourced income per year?