Question

Assume a wholly-owned subsidiary in country A (tax rate = 32%) makes 500 units of a product for $200 each and sells them to the parent company in country B (tax rate = 24%) for 360 USD each. The parent then sells them for 480 USD each in country B. The company has no other costs or sources of revenue. Given this information, answer the following questions.

1- How much corporate income tax will be paid in Country A?

2-If no income is repatriated from country A to country B, how much corporate income tax will be paid in Country B?

3-Assume the parent company wishes to repatriate the profits made in country A to its home country B. And assume there is no tax relief in country B (no Foreign Tax Credit, no participation exemption, and no double taxation agreement). How much additional taxes will the parent company pay in taxes in country B for the income they are repatriating?

4-Suppose in the above question, the parent company again wishes to repatriate the profit earned in Country A but this time Country B allows the parent company to claim a Foreign Tax Credit (FTC) for the taxes it paid in Country A. How much additional taxes would the parent company then pay in Country B for the income that it is repatriating from Country A?

5-Assuming that the parent company repatriates all the profits from country A to B and there is a Participation Exemption allowed by Country B that provides that only 50% of the repatriated income to be subject to income tax in Country B. Now what is the total tax bill paid in Country B from both income earned in B and income repatriated to B from A?

Answer 1

1. Calculate the corporate tax that will be paid in country A as shown below:

Profit earned=(Sale price-cost)*Number of units

=($360-$200)*500Units

=$80,000

Coporate tax=$80,000*32%

=$25,600

2.Calculate the corporate tax that will be paid in country B as shown below:

Profit earned= ($480-$360)*500

= $60,000

Corporate tax =$60,000*24%

=$14,400

3. Calculate the corporate tax if parent company wishes to repatriate the profits made in country A to its home country B and assume there is no tax relief in country B as shwn below:

Amount to be repatriated form country A to B=$80,000(Profit earned by Wholly owned subsidiary)

Additional taxes to be paid=$80,000*24%

=$19,200

4. Calculate the additional taxes would the parent company then pay in Country B for the income that it is repatriating from Country A, if foreign tax credit can be claimed.

Amount to be repatriated form country A to B=$80,000(Profit earned by Wholly owned subsidiary)

Additional taxes to be paid=(Profits Repatriated*tax rate)-taxes already paid in country A

($80,000*24%)-$25,600

=$0

Therefore, no additional taxes are to be paid.