Pacific Jewel Airlines is a U.S.-based air freight firm with a wholly owned subsidiary in Hong Kong. The subsidiary, Jewel Hong Kong, has just completed a long-term planning report for the parent company in San Francisco,

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, in which it has estimated the following expected earnings and payout rates for the years

2011dash2014.

The current Hong Kong corporate tax rate on this category of income is

17.517.5%.

Hong Kong imposes no withholding taxes on dividends remitted to U.S. investors (per the Hong

Konglong dashUnited

States bilateral tax treaty). The U.S. corporate income tax rate is

3939%.

The parent company wants to repatriate

8585%

of net income as dividends annually.a. Calculate the net income available for distribution by the Hong Kong subsidiary for the years

2011dash2014.

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

c. After estimating the theoretical U.S. tax liability on the expected dividend (what is often termed gross-up in the U.S.), what is the total dividend after tax, including all Hong Kong and U.S. taxes, expected each year?

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

a. Calculate the net income available for distribution by the Hong Kong subsidiary for the years

2011dash2014

in the following table. (Round to the nearest dollar.)

Jewel Hong Kong Income Items (millions US$)		2011		2012		2013		2014
Earnings before interest and taxes (EBIT)	$	6,000	$	8,000	$	10,000	$	12,000
Less interest expenses		(600)		(800)		(1,000)		(1,200)
Earnings before taxes (EBT)	$	5,400	$	7,200	$	9,000	$	10,800
Less Hong Kong corporate income taxes
Net income	$		$		$		$