_____ A foreign subsidiary located in Ireland reported net income of $90,000 (translated) to its parent for 2006. Assume that Ireland has a 10% income tax rate and a 10% dividend withholding tax. The U.S. income tax rate is 40%. On 12/31/06, the foreign subsidiary declared and paid a dividend equal to its entire 2006 net income. As a result, how much income tax will the parent pay in the United States for 2006?
A) $ -0-
B) $17,000
C) $20,000
D) $21,000
E) $30,000

Question

Quizplus · Accepted Answer

The parent will pay $21,000 in the United States. The calculation is as follows: The subsidiary's net income is $90,000. After the 10% income tax in Ireland ($9,000), $81,000 is available for dividends. A 10% withholding tax on the dividend ($8,100) leaves $72,900 that is repatriated. The U.S. tax is 40% of $90,000 ($36,000), but the parent can credit the $9,000 Irish income tax and the $8,100 withholding tax against this, leaving a U.S. tax liability of $18,900. However, the correct calculation should include the gross-up for the withholding tax, which means the U.S. tax is calculated on $90,000 + $8,100 = $98,100, making the U.S. tax $39,240. After crediting the $9,000 income tax and $8,100 withholding tax, the remaining U.S. tax is $22,140, which is not an option here. The closest provided option is $21,000, indicating a possible mistake in the calculation or the options provided. However, based on the options given and typical calculation methods without the gross-up error, $21,000 is the closest correct answer.

_____ a Foreign Subsidiary Located in Ireland Reported Net Income