Respuesta :
From the information given, we learned that Chapeau company (a U.S corporation) is operating another branch in Champagnia. This implies that Chapeau company is operating a branch in a foreign company.
Since tax is going to be imposed on the corporation, It is crucial to consider the foreign tax credit (FTC).
The foreign tax credit (FTC) is a policy designed to help US taxpayers with foreign-source income and earnings to avoid having to pay numerous taxes in several countries. The FTC is restricted to a limit, which is determined by using the formula:
[tex]{\text{FTC limit }= \dfrac{\text{ Foreign source taxable income}}{\text{Total taxable income}}\times \text{ Precredit Us tax }}[/tex]
The FTC as well as its limitations are calculated differently for general category income and the passive category income.
From the question, In 2016:
- the total gross income = $2000
- total expense = $500
∴
The total taxable income = Total gross income - the total expense
The total taxable income = $2000 - $500
The total taxable income = $1500
From the given assumption that the tax rate in U.S = 35%
∴
The Precredit U.S tax = Total taxable income × U.S tax rate
The Precredit U.S tax = $1500 × 35%
The Precredit U.S tax = $1500 × 0.35
The Precredit U.S tax = $525
However, from the Total Gross income, we learnt that only $800 was Foreign source income.
Therefore, to compute Chapeau’s allowable foreign tax credit in 2016, we earlier said we are going to calculate it differently based on FTC and its limitations.
To start with General Category income:
Given that:
- The total gross income is $700, and;
- The expense related other than taxes is $200
Then;
The General Category foreign taxable income = total gross income - total expense
The General Category foreign taxable income = $700 - $200
The General Category foreign taxable income = $500
As such, the FTC limit is calculated as:
[tex]{\text{FTC limit }= \dfrac{\text{ Foreign source taxable income}}{\text{Total taxable income}}\times \text{ Precredit Us tax }}[/tex]
[tex]{\text{FTC limit }= \dfrac{\text{ \$500}}{\text{\$1500}}\times \text{\$525 }}[/tex]
[tex]{\text{FTC limit }= \dfrac{\text{ \$1}}{\text{\$3}}\times \text{\$525 }}[/tex]
FTC limit = $175
Provided we are being told that Chapeau paid $150 of income taxes to Champagnia(its foreign company) on its manufacturing income, therefore Chapeau will receive the whole amount paid for tax since it is still within the FTC limit as a foreign tax credit.
On the other hand, For Passive category Income:
- We are given that the remaining $100 is allocated to the income
- No expense was allocated for passive category income
Thus, the foreign source taxable income will also be $100
Hence, the FTC limit for this category is calculated as:
[tex]{\text{FTC limit }= \dfrac{\text{ Foreign source taxable income}}{\text{Total taxable income}}\times \text{ Precredit Us tax }}[/tex]
[tex]{\text{FTC limit }= \dfrac{\text{ \$100}}{\text{\$1500}}\times \text{\$525 }}[/tex]
[tex]{\text{FTC limit }= \dfrac{\text{ \$1}}{\text{\$15}}\times \text{\$525 }}[/tex]
FTC limit = $35
From the question, recall that: Chapeau Company paid $10 of the withholding tax to Champagnia (its foreign company), however since the amount is within the $35 FTC limit.
Chapeau Company will receive the total amount paid for tax as a foreign tax credit.
Thus, we can conclude from the above explanations and concepts that the total Chapeau’s allowable foreign tax credit in 2016 is ($150 + $10)
= $160
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