USCo, a US C corporation, is a leading worldwide manufacturer and seller of widgets. It manufactures widgets in the US for worldwide sale. Some of USCo's international sales are foreign export sales made directly by USCo and the rest are made by USCo's Country X branch. All foreign sales by USCo and the branch are made to unrelated third-party customers for foreign use. Title to foreign export sales by USCo passes in the US. Title to sales by the branch passes outside the US. 

Additionally, USCo owns 100% of the shares of FCo, a foreign corporation, formed and operated in Country A which purchases widgets manufactured in Country C by unrelated third parties. FCo sells the purchased widgets 50% within the Country A market, for use therein and the 50% within the Country B market, for use therein. 

The following foreign income tax rates apply:

 

• USCo pay no foreign income tax on its foreign export sales
• USCo's Country X branch pays 25% foreign income tax
• FCo pays 10% foreign income tax on its Country A sales 
• FCo pays 40% foreign tax on its Country B sales. No high tax election has been made with respect to the Country B sales.

 

In 20X1, USCo has the following items of net income after the correct allocation of expenses:

•           $50 million of net income from sales of widgets within the United States

•           $25 million of net income from the foreign export sale of widgets for use outside the US

•           $25 million of net income from the Country X branch sale of widgets for use outside the US

USCo's average quarterly adjusted basis in its assets is $100 million. There is no interest expense allocable to any of these assets. All of these assets were used in direct proportion to the net income generated from USCo's sales within the US, its foreign export and its branch sales activities.

In 20X1 FCo earned $5 million net income from its selling activities, divided equally between Country X and Country Y sales. FCo had zero adjusted basis in its assets.

USCo has requested that you advise them as to the following questions:

1) How will USCo be taxed in the US on its direct foreign sales? 

2) How will USCo be taxed in the US on its branch sales?

3) How will USCo be taxed in the US on the income earned by FCo?

4) How much are USCo's foreign tax credits before limitation?

5) To what extent are the foreign tax credits calculated in #4 limited in 20X1 by the foreign tax credit limitation?