Question :

The corporate income tax rates in two countries, A and B, are 40% and 25%, correspondingly. Additionally, both countries impose a 30% withholding tax on dividends paid to foreign investors.

Thus, a bilateral tax treaty between A and B reduces the withholding tax to 10% if the dividend is paid to an investor that owns more than 50% of the paying company's stock parent. Both A and B use a worldwide approach to taxation but allow taxpayers to take a foreign tax credit for income taxes paid on foreign earned income.

The credit is limited to the amount of tax that could have been paid in the domestic country on that income.

Both countries use the same currency, so foreign currency translation is not required.

Part 1.

Albemarle Company is headquartered in Country A and has a completely owned subsidiary in Country B. In the existing year, Albemarle's foreign subsidiary generated before tax income of 100,000 and remitted 50% of its net income to the parent company as a dividend.

Required:

a. Evaluate the amount of taxes paid in Country A.

b. Evaluate the amount of taxes paid in Country B

Part 2.

Bostwick Company is headquartered in Country B and has a entirely owned subsidiary in Country A. In the existing year, Bostwick's foreign subsidiary generated before tax income of 100,000 and remitted 50% of its total income to the parent company as a dividend.

Required:

a. Evaluate the amount of taxes paid in Country A.

b. Evaluate the amount of taxes paid in Country B.