Question

Harry Mining, a U.S.-based MNC has a foreign subsidiary that earns $1,050,000 before local taxes, with all the after tax funds to be available to the parent in the form of dividends. The foreign income tax rate is 30 percent, the foreign dividend withholding tax rate is 15 percent, and the firm's U.S. tax rate is 35 percent. What are the funds available to the parent MNC if no tax credits are allowed?

Answer 1

Answer:

The funds available to the company is $ 624750 before applying the 35% U.S tax rate.

Explanation:

First we need to calculate the tax on the actual income earned of $ 1050 000 x 30% = 315000

The remainder of retained earnings are $ 735000 which will be distributed as a dividend.

Of this there will be a 15% dividend withholding tax. $ 735000 x 15% = $ 110250

Thus the actual amount received by the parent in the US will be $ 624750.

However on this amount received the company will need to pay tax at 35%.