Question

Quantco, a domestic corporation, is an engineering consulting firm that has its main offices in San Diego, California. Because Quantco does a considerable amount of business in China, it has a branch office in Beijing. During the current year (2020), Quantco generates a total pre-tax profit of $100 million (all from active business operations), including $80 million of profits from its U.S. operations and $20 million of profits from its foreign branch in China. Assume the U.S. tax rate is 21% and the Chinese rate is 26%.
Required:
Compute Quantco's total foreign tax credit and excess credit and/or limitation (if any).

Answer 1

Answer:

Quantco

Quantico total foreign tax credit = $5.2 million, but this is limited to $4.2 million, giving rise to an excess tax credit of $1 million.

Explanation:

a) Data and Calculations:

Pre-tax profit from active business operations = $100 million

Domestic pre-tax profit = $80 million

Foreign pre-tax profit = $20 million

US tax rate = 21%

Chinese tax rate = 26%

US tax on the foreign pre-tax profit = $4.2 million ($20 million * 21%)

Therefore, the total foreign tax credit = $4.2 million

Chinese withholding tax = $5.2 million ($20 million * 26%)

The limitation of the withholding tax = $4.2 million

Excess tax credit = $1 million ($5.2 - $4.2)

b) The IRS will limit the foreign tax credit which Quantco Corporation can claim to the lesser of the amount of foreign taxes paid ($5.2 million) or the U.S. tax liability on the foreign income ($4.2 million).