Case 8-1 Worldwide United Corporation Worldwide United Corporation (WUC) a U.S. taxpayer, manufactures and sells products through a network of foreign branches and wholly-owned foreign subsidiaries. Relevant information for these entities for the current year appears in the following table: Entity A B C D Country Legal Form Activity Bahrain Branch Sales Bermuda Corporation Sales Hong Kong Corporation Manufacturing Hungary Corporation Sales Ireland Corporation Investment Malaysia Branch Manufacturing Mexico Corporation Manufacturing Switzerland Corporation Sales Income Before Tax 1,000,000 8,000,000 10,000,000 10,000,000 2,000,000 10,000,000 5,000,000 500,000 Dividend Net Dividend Income Withholding Received by Tax Rate Tax Rate Parent 0% 0% 1,000,000 0% 0% 8,000,000 16.5% 0% 8,350,000 9% 0% 9,100,000 12.5% 0% 1,750,000 24% 0% 7,600,000 30% 3,325,000 17% 35% 269,750 E F 5% H Additional Information: 1. Entities C, F, and G manufacture products that are sold in their home countries as well as to sister entities within the WUC group. 2. Entity A purchases finished products from Entity F and then sells them throughout the Middle East. Only 5% of A's income is generated from sales to customers in Bahrain; 95% of A's income is from sales to foreign customers. 3. Entity B purchases finished products from Entity G and sells them throughout North and South America. Only 1% of B's income is from sales to customers in Bermuda; 99% of B's income is from sales to foreign customers. 4. Entity D purchases finished products from Entity C and then sells them throughout Europe. Only 40% of D's income is generated from sales to customers in Hungary; 60% of D's income is from sales to foreign customers. 5. Entity E makes passive investments in stocks and bonds in European financial markets. All of E's income is derived from dividends and interest. 6. Entity H provides accounting and other management services to WUC's other foreign operations. All of H's income is derived from providing services to sister companies within the WUC group. Required 1. Determine the amount of U.S. taxable income for each entity (A, B, C, D, E, F, G, and H). 2. Calculate the FTC allowed in the U.S., first by FTC basket and then in total. 3. Determine the net U.S. tax liability on foreign source income. 4. Determine any excess FTCs and identify by basket. (1) Is the entity a branch? A Yes B No No D No E No F Yes G No No No (2) Is the entity a CFC? Parent owns > 50% N/A (3) Does the CFC have Subpart F Income? Examples: passive, sales, or service Branch (4) Which FTC Basket does this Income belong to? N/A (5) Does the CFC meet the Safe Harbor Rule? Foreign sub's income not taxable if: Effective Foreign Tax Rate 2 18.9% (6) How Much of the Entity's Income is taxable in the U.S. 1,000,000 Taxable Branch Income Taxable General Income Taxable Passive Income Entity A B D E F G Income Before Tax 1,000,000 8,000,000 10,000,000 10,000,000 2,000,000 10,000,000 5,000,000 500,000 H Total Income for each FTC Basket Case 8-1 Worldwide United Corporation Worldwide United Corporation (WUC) a U.S. taxpayer, manufactures and sells products through a network of foreign branches and wholly-owned foreign subsidiaries. Relevant information for these entities for the current year appears in the following table: Entity A B C D Country Legal Form Activity Bahrain Branch Sales Bermuda Corporation Sales Hong Kong Corporation Manufacturing Hungary Corporation Sales Ireland Corporation Investment Malaysia Branch Manufacturing Mexico Corporation Manufacturing Switzerland Corporation Sales Income Before Tax 1,000,000 8,000,000 10,000,000 10,000,000 2,000,000 10,000,000 5,000,000 500,000 Dividend Net Dividend Income Withholding Received by Tax Rate Tax Rate Parent 0% 0% 1,000,000 0% 0% 8,000,000 16.5% 0% 8,350,000 9% 0% 9,100,000 12.5% 0% 1,750,000 24% 0% 7,600,000 30% 3,325,000 17% 35% 269,750 E F 5% H Additional Information: 1. Entities C, F, and G manufacture products that are sold in their home countries as well as to sister entities within the WUC group. 2. Entity A purchases finished products from Entity F and then sells them throughout the Middle East. Only 5% of A's income is generated from sales to customers in Bahrain; 95% of A's income is from sales to foreign customers. 3. Entity B purchases finished products from Entity G and sells them throughout North and South America. Only 1% of B's income is from sales to customers in Bermuda; 99% of B's income is from sales to foreign customers. 4. Entity D purchases finished products from Entity C and then sells them throughout Europe. Only 40% of D's income is generated from sales to customers in Hungary; 60% of D's income is from sales to foreign customers. 5. Entity E makes passive investments in stocks and bonds in European financial markets. All of E's income is derived from dividends and interest. 6. Entity H provides accounting and other management services to WUC's other foreign operations. All of H's income is derived from providing services to sister companies within the WUC group. Required 1. Determine the amount of U.S. taxable income for each entity (A, B, C, D, E, F, G, and H). 2. Calculate the FTC allowed in the U.S., first by FTC basket and then in total. 3. Determine the net U.S. tax liability on foreign source income. 4. Determine any excess FTCs and identify by basket. (1) Is the entity a branch? A Yes B No No D No E No F Yes G No No No (2) Is the entity a CFC? Parent owns > 50% N/A (3) Does the CFC have Subpart F Income? Examples: passive, sales, or service Branch (4) Which FTC Basket does this Income belong to? N/A (5) Does the CFC meet the Safe Harbor Rule? Foreign sub's income not taxable if: Effective Foreign Tax Rate 2 18.9% (6) How Much of the Entity's Income is taxable in the U.S. 1,000,000 Taxable Branch Income Taxable General Income Taxable Passive Income Entity A B D E F G Income Before Tax 1,000,000 8,000,000 10,000,000 10,000,000 2,000,000 10,000,000 5,000,000 500,000 H Total Income for each FTC Basket