1. Tireco, a domestic corporation, is a tire manufacturer. Tireco is planning to build a new production facility, and has narrowed down the possible sites for this new plant to either Goodstan (a low-tax foreign country) or Badstan (a high-tax foreign country). Tireco will structure the new facility as a wholly-owned foreign subsidiary, Sproutco, and finance Sproutco solely with an equity investment. Tireco projects that Sproutcos results during its first year of operations will be as follows:

   Sales................................................................	$400,000,000
   Cost of goods sold.............................................	(290,000,000)
   Selling, general, and administrative expenses....................	(60,000,000)
   Net profit .............................................................................	$50,000,000

   Assume that the United States corporate tax rate is 35%, the Goodstan rate is 20%, and the Badstan rate is 40%. Further, assume that both Goodstan and Badstan impose a 5% withholding rate on dividend distributions, but neither country imposes withholding taxes on interest or royalty payments. Compute the total tax rate (United States plus foreign) on Sproutcos profits under the following assumptions:
   1. The new production facility is located in Goodstan and Sproutco repatriates none of its profits during the first year.
   2. The new production facility is located in Goodstan and Sproutco repatriates 30% of its profits during the first year through a dividend distribution.
   3. The new production facility is located in Badstan and Sproutco repatriates none of its profits during the first year.
   4. The new production facility is located in Badstan and Sproutco repatriates 30% of its profits during the first year through a dividend distribution.
   5. The new production facility is located in Badstan and Tireco modifies its plans for Sproutco as follows:
      1. finance Sproutco with both debt and equity, such that Sproutco will pay Tireco $15 million of interest each year,
      2. charge Sproutco an annual royalty of $10 million for the use of Sproutcos patents and trade secrets, and
      3. eliminate Sproutcos dividend distribution.
   What do the results of these various scenarios suggest regarding the differential tax costs of operating in low- versus high-tax countries?
2. Six years ago, Bullco, Inc., a domestic manufacturer of mold- injection systems, established a sales and service operation in Madrid, Spain. The Madrid office was structured as a Spanish corporation, but Bullco made a check-the-box election to treat the operation as a branch in order to obtain a U.S. tax deduction for the branchs start-up losses. The Spanish operation has become quite profitable and Bullco wishes to change its United States tax classification from a branch to a subsidiary by filing a new check-the-box election (this is feasible since 5 years had passed since the first election). At the time of the conversion, the Spanish operations assets includes some local currency, accounts receivable from Spanish customers, an inventory of spare parts, and an extensive database of information regarding Spanish customers that the marketing personnel had painstakingly developed over the years. Bullcos CFO has asked you to brief her regarding the United States tax consequences of the incorporation transaction. Briefly outline your response.
3. A foreign corporation can structure its United States operations as either a branch or a subsidiary. What are the tax advantages of operating in the United States through a separately incorporated subsidiary? What are the tax advantages of operating in the United States through an unincorporated branch? What general business factors should be considered when choosing between the branch and subsidiary forms of doing business in the United States?