Baseline Values

Case 1

Case 2

a Foreign corporate income tax rate

28?%

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

?$3,200,000

?$3,200,000

2 Foreign corporate income tax

?(896,000?)

?(1,344,000?)

3 Net income available for distribution

?$2,304,000

?$1,856,000

4 Retained earnings

0

0

5 Distributed earnings

2,304,000

1,856,000

6 Distribution to U.S. parent company

2,304,000

1,856,000

7 Withholding taxes on dividends

345,600

0

8 Net remittance to U.S. parent

?$1,958,400

?$1,856,000

U.S. Corporate Tax Computation on Foreign Income

9 Dividend received before withholding

?$2,304,000

?$1,856,000

10 Add back foreign? deem-paid tax

896,000

1,344,000

11 ? Grossed-up foreign dividend

?$3,200,000

?$3,200,000

12 Tentative U.S. liability

1,216,000

1,216,000

13 Less credit for foreign taxes

       a foreign income taxes paid      

?(896,000?)

?(1,344,000?)

       b foreign withholding taxes paid

?(345,600?)

?(0?)

       c total

?($1,241,600?)

?($1,344,000?)

14 Additional U.S. taxes due

?$0

?$0

15 Excess foreign tax credits

25,600

128,000

16 ? After-tax income from foreign subsidiary

?$1,984,000

?$1,984,000