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3. Assume that MNC Company (a U.S. tax payer) has four subsidiaries located in four different foreign countries. The country location, MNC's percentage ownership, nature Step 5 : Determine the grossed-up dividend for the subsidiaries that do not have of activity, and income before tax for each subsidiary; the income and withholding tax subpart F income larger than 5%. rates in the host countries; and the dividend paid by each subsidiary to MNC are Subsidiary Net dividend Corporate Withholding Grossed-up summarized as follows: location income tax tax rate on dividend Foreign Entity A B C D rate dividend Country Germany Zambia Hongkong Singapore Germany $66,500 30% 5% (11) Legal form Subsidiary Subsidiary Subsidiary Subsidiary Zambia $36,000 35% 10% (12) MNC's ownership 100% 70% 60% 80% Singapore $50,000 17% 0% (13 Activity Manufacturing Manufacturing |Investment | Mining Before-tax income $100,000 $120,000 $150,000 $200,000 Step 6: Determine foreign tax credits and U.S. tax liability by baskets Income-tax rate 30% 35% 16.5% 179 Subsidiary Germany Zambia Singapore After-tax income $70,000 $78,000 $125,250 $166,000 location Withholding tax rate 5% 109 0% 0% Grossed-up (14) (15) (16) Net dividend received $66,500 $36,000 $40,000 $50,000 dividend Net amount $66,500 $36,000 $50,000 by MNC Determine 1) the amount of U.S. taxable income for each Entity A-D; 2) the foreign tax received by MNC credit allowed in the United states, first by basket and then in total; 3) The net U.S. tax Taxes paid to (17) (18) (19) liability. Please answer the questions by filling in the following white blanks labelled foreign with numbers, e.g. (1), (2), ......, (31). government Step 1: Determine whether the foreign operation is a branch or subsidiary. Passive income General Income All the foreign operations are subsidiaries. U. S. taxable income (20) (21 U.S. income tax before FTC (35% (22 (23) Step 2: Determine whether the subsidiaries are CFCs or not. Less: FTC Yes, all the foreign operations are CFCs. (a) Taxes paid to foreign (24 (25) government Step 3: Whether the subsidiaries are located in tax havens or not. (b) Overall FTC limitation (26) (27) Subsidiary Corporate Withholding Effective tax Tax haven or FTC allowed - lesser of (a) and (b) (28 (29) location income tax tax rate on rate on not (Yes or No) U.S. tax liability (30) (31) rate dividend dividends Germany 30% 5% (1) (5) Zambia 35% 10% (2) (6) Hongkong 16.5% 0% (3) (7) Singapore 17% 0% (4 ) (8) Step 4 : Whether the subsidiaries in tax haven have any subpart F income. Subsidiary Have subpart F income location or not (Yes or No) Germany Zambia Hongkong (9) Singapore
