Avon's Foreign-Source Income. Avon is a U.S.-based direct seller of a wide array of products. Avon markets leading beauty, fashion, and home products in more than 100 countries. As part of the training in its corporate treasury offices, it has its interns build a spreadsheet analysis of the following hypothetical subsidiary earnings/distribution analysis. Use the tax analysis presented in the popup window for your basic structure (see below)
Case 1 Case 2
a Foreign corporate income tax rate 30% 42%
b U.S. corporate income tax rate 38% 38%
c Foreign dividend withholding tax rate 15% 0%
d U.S. ownership in foreign firm 100% 100%
e Dividend payout rate of foreign firm 100% 100%
Foreign Subsidiary Tax Computation
1 Taxable income of foreign subsidiary $3,600,000 $3,600,000
2 Foreign corporate income tax (1,080,000) (1,512,000)
3 Net income available for distribution $2,520,000 $2,088,000
4 Retained earnings 0 0
5 Distributed earnings 2520000 2088000
6 Distribution to U.S. parent company 2520000 2088000
7 Withholding taxes on dividends 378000 0
8 Net remittance to U.S. parent $2,142,000 $2,088,000
U.S. Corporate Tax Computation on Foreign Income
9 Dividend received before withholding $2,520,000 $2,088,000
10 Add back foreign deem-paid tax 1080000 1512000
11 Grossed-up foreign dividend $3,600,000 $3,600,000
12 Tentative U.S. liability 1368000 1368000
13 Less credit for foreign taxes
a foreign income taxes paid (1,080,000) (1,512,000)
b foreign withholding taxes paid (378,000) (0)
c total ($1,458,000) ($1,512,000)
14 Additional U.S. taxes due $0 $0
15 Excess foreign tax credits 90000 144000
16 After-tax income from foreign subsidiary $2,232,000 $2,232,000
a. What is the total tax payment, foreign and domestic combined, for this income?
b. What is the effective tax rate paid on this income by the U.S.-based parent company?
c. What would be the total tax payment and effective tax rate if the foreign corporate tax rate was 42 % and there were no withholding taxes on dividends?
d. What would be the total tax payment and effective tax rate if the income was earned by a branch of the U.S. corporation?