Question

Suppose that a subsidiary operates in a foreign country with a corporate tax rate of 42% and a withholding tax on dividends of 5%. If the U.S. parent has surplus foreign tax credits, what is the marginal rate of tax on remitted profits from the subsidiary? a. 13% b. 34% c. 8% d. 5%

Answer 1

Answer:

correct option is d. 5%

Explanation:

given data

corporate tax rate = 42%

tax on dividends = 5%

to find out

marginal rate of tax on remitted profits

solution

we know that here withholding tax is a tax which is subsidiary need to pay before remitting dividend to foreign parent company

marginal rate of tax on remitted profits base on  these 2 factors

1st  is the foreign tax credits

2nd is tax rate in home country

for marginal 1st entire foreign tax credit used and when its completely exhausted after that tax rate of the home country is used

and here withholding tax on dividend = surplus foreign tax credits

so marginal tax rate on remitted profits = withholding tax

so that marginal rate of tax on remitted profit = 5%

correct option is d. 5%