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Orleans Corporation, a U.S. corporation, reported U.S. taxable income of $2,000,000. Included in the computation of...

Orleans Corporation, a U.S. corporation, reported U.S. taxable income of $2,000,000. Included in the computation of taxable income was a $400,000 dividend from a 5%-owned Canadian subsidiary. A withholding tax of $8,000 was imposed on the dividend. What is Orleans’s net U.S. tax liability?

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Answer #1

When an American Company buys stocks or bonds from foriegn based companies , any investment income (interest, dividend) are subject to US income tax and taxes levied by the the company home country. However the US tax code offers "foreign tax credit" . The amount of foreign tax one can claim as credit is based on how much you be taxed on the same proceeds under US tax law.

In this case Orleans Corporation a US corp will be taxed on income of $2,000,000 which includes a taxable income of $400,000 as dividend from 5% owned Canadian subsidiary however will be allowed to claim tax credit of $ 8,000 (withholding tax) thus reducing the actual tax due.

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