Problem 2: 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, 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 Chinese operations. Assume the U.S. tax rate is 35% and the Chinese rate is 40%.
Compute Quantco's creditable foreign income taxes, foreign tax credit limitation, and excess credits (if any).
Now assume that Quantco has a second foreign branch office in Singapore which generates $10 million of profits (all from active business operations), on which Quantco pays Singapore taxes. Assume the Singapore tax rate is 25%. Recompute Quantco's creditable foreign income taxes, foreign tax credit limitation, and excess credits. What is the name of the phenomenon by which the Singapore profits resulted in the elimination of the excess credits on the Chinese profits?
Problem 3: Trikeco, a domestic corporation, manufactures mountain bicycles for sale both in the United States and Europe. Trikeco operates in Europe through Trike1, a wholly owned Italian corporation that manufactures a special line of mountain bicycles for the European market.
In addition, Trike1 owns 100% of Trike2, a U.K. corporation that market's Trike1's products in the United Kingdom. At the end of the current year, the undistributed earnings and foreign income taxes of Trike1 and Trike2 are as follows:
Trike 1 Trike2
Post - 1986 undistributed earnings: $90 million $54 million
Post-1986 foreign income taxes: $36 million $27 million
During the current year, Trike2 distributed a $10 million dividend to Trike1, and Trike1 distributed a $10 million divident to Trikeco. To simplify the computations, assume that neither dividend distributions attracted any Italian or U.K. withholding taxes, and that the dividend received by Trike1 was exempt from Italian taxation.
Compute Trikeco's deemed paid foreign tax credit, as well as the residual U.S. tax, if any, on the dividend Trikeco received from Trike1. Assume the U.S. tax rate is 35%.
Problem 4: Shedco, a domestic corporation, operates in Asia through Shed1, a wholly owned Hong Kong subsidary. At the end of the current year, Shed1's pools of post-1986 undistributed earnings and post-1986 foreign income taxes are as follows:
Post-1986 undistributed earnings Post-1986 income taxes
General limitation income $24 million $18 million
Passive income $12 million $3 million
Totals $36 million $21 million
During the current year, Shed1 distributed a $6 million dividend to Shedco. Compute Shedco's deemed paid foreign tax credit, as well as the residual U.S. tax, if any, on the dividend Shedco received from Shed1. Assume the U.S. tax rate is 35%.
PROBLEM 5Tenco, a domestic corporation, manufactures tennis rackets for sale in the United States and abroad. Tenco owns 100% of the stock of Teny, a foreign marketing subsidiary that was organized in Year 1. During Year 1, Teny had $15 million of foreign base company sales income, paid $3 million in foreign income taxes, and distributed no dividends. During Year 2, Teny had no earnings and profi ts, paid no foreign income taxes, and distributed a $12 million dividend.
Assuming the U.S. corporate tax rate is 35%, what are the U.S. tax consequences of Teny's Year 1 and Year 2 activities?