Question

Blackwater Company has a foreign branch that earns income before income taxes of $500,000.  Income taxes paid to the foreign government are $150,000 or 30%.  Sales and other taxes paid to the foreign government are $100,000.  Blackwater Company must include the $500,000 of foreign branch income in determining its home country taxable income.  In determining its taxable income, Blackwater can choose between taking a deduction for all foreign taxes paid or a credit only for foreign income taxes paid.  The corporate income tax rate in Blackwater’s’ home country is 40%.

1. Determine whether Blackwater would be better off taking a deduction of a credit for foreign taxes paid (FTC).
2. If foreign tax rate increased from 30% to 50%, how would it change your answer?
3. If foreign tax rate decreased from 30% to 10%, how would it change your answer?
4. If parent country’s tax rate decreased from 40% to 20%, how would it change your answer?
5. If local taxes were $250,000, how would it change your answer?

Answer 1

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