3. Assume that MNC Company (a U.S. tax payer) has four subsidiaries located in four different foreign countries. The country location, MNC's percentage ownership, nature of activity, and income before tax for each subsidiary; the income and withholding tax rates in the host countries; and the dividend paid by each subsidiary to MNC are summarized as follows: Foreign Entity Country Germany Zambia Hongkong Cayman Is. Legal form Subsidiary Subsidiary Subsidiary Subsidiary MNC's ownership 100% 70% | 60% 80% Activity Manufacturing Manufacturing Mining Investment Before-tax income $100,000 $120,000 $150,000 $200,000 Income-tax rate 30% 35% 16.5% 0% After-tax income $70,000 $78,000 $125,250 $200,000 Gross-dividend paid to $70,000 $40,000 $40,000 $0 MNC Withholding tax rate 5% 10% 0% 0% Net dividend received $66,500 $36,000 $40,000 by MNC Determine 1) the amount of U.S. taxable income for each Entity A-D; 2) the foreign tax credit allowed in the United states, first by basket and then in total; 3) The net U.S. tax liability. Please answer the questions by filling in the following white blanks labelled with numbers, e.g. (1), (2), ......, (31). $0 Step 1: Determine whether the foreign operation is a branch or subsidiary. All the foreign operations are subsidiaries. Step 2: Determine whether the subsidiaries are CFCs or not. Yes, all the foreign operations are CFCs. Tax haven or not (Yes or No) Step 3: Whether the subsidiaries are located in tax havens or not. Subsidiary Corporate Withholding Effective tax location income tax tax rate on rate on rate dividend dividends Germany 30% 5% (1) Zambia 35% 10% (2) Hongkong 16.5% 0% (3) Cayman Is. | 0% (4) (5) (6) 0% (8) Step 4: Whether the subsidiaries in tax haven have any subpart F income. Subsidiary Have subpart F income location or not (Yes or No) Germany Zambia Hongkong Cayman Is. (10) Step 5: Determine the grossed-up dividend for the subsidiaries that do not have subpart F income larger than 5%. Subsidiary Net dividend Corporate Withholding Grossed-up location income tax tax rate on dividend rate dividend Germany $66,500 30% 5% (11) Zambia $36,000 35% 10% (12) | Hongkong $40,000 | 16.5% 0% (13) Step 6: Determine foreign tax credits and U.S. tax liability by baskets Subsidiary Germany Zambia Hongkong location Grossed-up (14) (15) (16) dividend Net amount $66,500 $36,000 $40,000 received by MNC Taxes paid to (17) (18) (19) foreign government Passive income General Income (20) (21) (22) (23) (24) (25) U.S. taxable income U.S. income tax before FTC (35%) Less: FTC (a) Taxes paid to foreign government (b) Overall FTC limitation FTC allowed - lesser of (a) and (b) U.S. tax liability (26) (28) (30) (27) (29) (31) 3. Assume that MNC Company (a U.S. tax payer) has four subsidiaries located in four different foreign countries. The country location, MNC's percentage ownership, nature of activity, and income before tax for each subsidiary; the income and withholding tax rates in the host countries; and the dividend paid by each subsidiary to MNC are summarized as follows: Foreign Entity Country Germany Zambia Hongkong Cayman Is. Legal form Subsidiary Subsidiary Subsidiary Subsidiary MNC's ownership 100% 70% | 60% 80% Activity Manufacturing Manufacturing Mining Investment Before-tax income $100,000 $120,000 $150,000 $200,000 Income-tax rate 30% 35% 16.5% 0% After-tax income $70,000 $78,000 $125,250 $200,000 Gross-dividend paid to $70,000 $40,000 $40,000 $0 MNC Withholding tax rate 5% 10% 0% 0% Net dividend received $66,500 $36,000 $40,000 by MNC Determine 1) the amount of U.S. taxable income for each Entity A-D; 2) the foreign tax credit allowed in the United states, first by basket and then in total; 3) The net U.S. tax liability. Please answer the questions by filling in the following white blanks labelled with numbers, e.g. (1), (2), ......, (31). $0 Step 1: Determine whether the foreign operation is a branch or subsidiary. All the foreign operations are subsidiaries. Step 2: Determine whether the subsidiaries are CFCs or not. Yes, all the foreign operations are CFCs. Tax haven or not (Yes or No) Step 3: Whether the subsidiaries are located in tax havens or not. Subsidiary Corporate Withholding Effective tax location income tax tax rate on rate on rate dividend dividends Germany 30% 5% (1) Zambia 35% 10% (2) Hongkong 16.5% 0% (3) Cayman Is. | 0% (4) (5) (6) 0% (8) Step 4: Whether the subsidiaries in tax haven have any subpart F income. Subsidiary Have subpart F income location or not (Yes or No) Germany Zambia Hongkong Cayman Is. (10) Step 5: Determine the grossed-up dividend for the subsidiaries that do not have subpart F income larger than 5%. Subsidiary Net dividend Corporate Withholding Grossed-up location income tax tax rate on dividend rate dividend Germany $66,500 30% 5% (11) Zambia $36,000 35% 10% (12) | Hongkong $40,000 | 16.5% 0% (13) Step 6: Determine foreign tax credits and U.S. tax liability by baskets Subsidiary Germany Zambia Hongkong location Grossed-up (14) (15) (16) dividend Net amount $66,500 $36,000 $40,000 received by MNC Taxes paid to (17) (18) (19) foreign government Passive income General Income (20) (21) (22) (23) (24) (25) U.S. taxable income U.S. income tax before FTC (35%) Less: FTC (a) Taxes paid to foreign government (b) Overall FTC limitation FTC allowed - lesser of (a) and (b) U.S. tax liability (26) (28) (30) (27) (29) (31)
