Question

Trixie Company has a foreign branch in Switzerland that earns income before income taxes of $500,000. Income taxes paid to the Swiss government are $150,000 or 30%. However, Switzerland is known for their extremely high local taxes - as such, Trixie Company's branch paid $250,000 to the Swiss government for sales and other local taxes. Trixie Company must include the $500,000 of Foreign branch income in determining its home country taxable income. In determining its taxable income, Trixie Company 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 Trixie's home country is 40%.

Determine whether Trixie company would be better off taking a deduction or a credit for foreign taxes paid (FTC). Please show your work.

Answer 1

Determination of Tax payable by Trixie company in Home Country

If Trixie company takes deduction for all foreign taxes paid
	$
Foreign Branch Income	500000
Deduction:
sales and other local taxes paid to swiss Govt.	(250000)
Income taxes paid to the Swiss government	(150000)
Taxable Income	100000
tax@40%	40000
If Trixie company takes credit only for foreign income taxes paid
Foreign Branch Income	500000
Tax @40%	200000
Credit for foreign income taxes paid	(150000)
Tax Payable	50000

As per above calculations Trixie company would be better off taking a deduction.

Note: $250,000 to the Swiss government for sales and other local taxes are not considered for FTC as credit was only available for foreign income taxes paid and not for any other taxes.