Lucy Van Pelt Corporation is a U.S. based manufacturer of fashion accessories that produce raincoats in the plant in San Louis, MO, and sells directly to the retailers in the United States. As Chief Financial Officer, you are responsible for all the companies Finance, accounting, and tax-related issues.

Chief executive officer and majority shareholder (and part-time psychologist) have informed you of her plan to begin exporting to the United Kingdom where she believes there is a substantial Market for Van Pelt raincoats. Rather than selling directly to British raincoat retailers, she plans to establish a wholly-owned UK sales subsidiary that will purchase raincoat from its U.S. parent and then distribute them in the United Kingdom. Yesterday, you received the following Memo from Lucy Van Pelt.

Memorandum

Subject: Export Soles Prices

It has come to my attention that the corporate income tax rate in Great Britain is only 25%, as compared to the 35% rate we pay here in the United States. Since our average production cost is $20.00 per unit and the price we expect to sell to the UK retailers is $50.00 per unit, why don't we plan to sell to our UK subsidiary at $25.00 per unit? That way we make $5.00 profit here in the United States and $25.00 of profit in the United Kingdom, where we pay a lower tax rate. We have plans to invest in a factory in Scotland in the next few years anyway, so we can keep the profit we earn over there for that purpose. What do you think?

P .S. If you see my brother, tell him to ditch that stupid blanket.

Required:

Draft a memo responding to Lucy Van Pelt's question by explaining U.S. income tax regulations related to the export sales described in her memo. Include a discussion of any significant risks associated with her proposal. Make a recommendation with respect to how the prices for these sales might be determined. Suggest where she might find her brother (hint: think Halloween).

Assume that McD's operation in Great Britain Is registered with the British government as a branch.

Required: Determine the amount of U.S. taxable Income, U.S. foreign tax credit, and net U.S. tax liability related to the British branch (all in U.S. dollars).

Assume that McD's operation in Great Britain Is Incorporated as a subsidiary.

Required: Determine the amount of U.S. taxable Income, U.S. foreign tax credit, and net U.S. tax liability related to the British branch (all in U.S. dollars).