If a foreign subsidiary pays a cash dividend to its parent in the U.S., the U.S. tax authorities require several computations to ascertain the extent of any tax liability in the U.S. Which of the following statements about this process are correct?
A) The company must "gross-up" the dividend to its before-tax equivalent and add this to taxable income.
B) The IRS allows the company to deduct a foreign tax credit from total parent taxable foreign-source dividends before taxes are calculated.
C) If the deemed-paid tax to the foreign country is less than the tax that would be due on the same income in the U.S., the company must pay the difference to the IRS.
D) All of the statements above are correct.
E) Only statements b and c are correct.

Question

Quizplus · Accepted Answer

All the statements provided are correct regarding the process of how U.S. tax authorities handle cash dividends paid by a foreign subsidiary to its parent in the U.S. The company must gross up the dividend to its before-tax equivalent (A), it can deduct a foreign tax credit (B), and if the foreign tax is less than what would be due in the U.S., the difference must be paid to the IRS (C).

If a Foreign Subsidiary Pays a Cash Dividend to Its