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 which it has estimated the following expected earnings and payout rates for 2014.

Earnings before interest and taxes $10,000

Less interest expense $1,000

Earnings before taxes $9,000

The current Hong Kong corporate tax rate on this category of income is 16.5 percent. Hong Kong imposes no withholding taxes on dividends remitted to U.S. investors (per the Hong Kong-United States bilateral tax treaty). The U.S. corporate income tax rate is 35 percent. The parent wants to repatriate 75 percent of net income as dividends.

1)Calculate the net income available for distribution by the Hong Kong subsidiary in 2014.

2)What is the expected amount of the dividend to be remitted to the U.S. parent next year?

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

4)What is the effective tax rate on this foreign-sourced income next year?