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 fiscal year appears in the following table Entity Country Legal Form Activity Income before Tax Income Tax Rate Dividend Withholding Tax Rate Net Dividend Received by Parent A Bahrain Branch Sales $1,000,000 0 0 $1,000,000 B Bermuda Corporation Sales 8,000,000 0 0 8,000,000 C Hong Kong Corporation Manufacturing 10,000,000 16 5 0 8,350,000 D Hungary Corporation Sales 10,000,000 9 0 9,100,000 E Ireland Corporation Investment 2,000,000 12 5 0 1,750,000 F Malaysia Branch Manufacturing 10,000,000 24 0 7,600,000 G Mexico Corporation Manufacturing 5,000,000 30 5 3,3250,000 H Switzerland Corporation Service 500,000 17 35 269,750 Additional Information Page 368 Entities C, F, and G manufacture products that are sold in their home countries as well as to sister entities within the WUC group Entity A purchases finished products from Entity F and then sells them throughout the Middle East Only 5 percent of As income is generated from sales to customers in Bahrain 95 percent of As income is from sales to foreign customers Entity B purchases finished products from Entity G and sells them throughout North and South America Only 1 percent of Bs income is from sales to customers in Bermuda 99 percent of Bs income is from sales to foreign customers Entity D purchases finished products from Entity C and then sells them throughout Europe Only 40 percent of Ds income is generated from sales to customers in Hungary 60 percent of Ds income is from sales to foreign customers Entity E makes passive investments in stocks and bonds in European financial markets All of Es income is derived from dividends and interest Entity H provides accounting and other management services to WUCs other foreign operations All of Hs income is derived from providing services to sister companies within the WUC group Required Determine the amount of U S taxable income for each entity (A, B, C, D, E, F, G, and H) Calculate the foreign tax credit allowed in the United States, first by foreign tax credit basket and then in total Determine the net U S tax liability on foreign source income Determine any excess foreign tax credits and identify by basket

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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

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 fiscal year appears in the following table:

Entity	Country	Legal Form	Activity	Income before Tax	Income Tax Rate	Dividend Withholding Tax Rate	Net Dividend Received by Parent
A	Bahrain	Branch	Sales	$1,000,000	0%	0%	$1,000,000
B	Bermuda	Corporation	Sales	8,000,000	0	0	8,000,000
C	Hong Kong	Corporation	Manufacturing	10,000,000	16.5	0	8,350,000
D	Hungary	Corporation	Sales	10,000,000	9	0	9,100,000
E	Ireland	Corporation	Investment	2,000,000	12.5	0	1,750,000
F	Malaysia	Branch	Manufacturing	10,000,000	24	0	7,600,000
G	Mexico	Corporation	Manufacturing	5,000,000	30	5	3,3250,000
H	Switzerland	Corporation	Service	500,000	17	35	269,750

Additional Information:

Page 368

Entities C, F, and G manufacture products that are sold in their home countries as well as to sister entities within the WUC group.
Entity A purchases finished products from Entity F and then sells them throughout the Middle East. Only 5 percent of As income is generated from sales to customers in Bahrain; 95 percent of As income is from sales to foreign customers.
Entity B purchases finished products from Entity G and sells them throughout North and South America. Only 1 percent of Bs income is from sales to customers in Bermuda; 99 percent of Bs income is from sales to foreign customers.
Entity D purchases finished products from Entity C and then sells them throughout Europe. Only 40 percent of Ds income is generated from sales to customers in Hungary; 60 percent of Ds income is from sales to foreign customers.
Entity E makes passive investments in stocks and bonds in European financial markets. All of Es income is derived from dividends and interest.
Entity H provides accounting and other management services to WUCs other foreign operations. All of Hs income is derived from providing services to sister companies within the WUC group.

Required:

Determine the amount of U.S. taxable income for each entity (A, B, C, D, E, F, G, and H).
Calculate the foreign tax credit allowed in the United States, first by foreign tax credit basket and then in total.
Determine the net U.S. tax liability on foreign source income.
Determine any excess foreign tax credits and identify by basket.