Question

International Tax Aspects (LO. 8)

Smile Corporation invests $2 million for a 49% interest in Irehoe, Inc., a newly formed Irish corporation that manufactures farm equipment. Jim, a U.S. resident, owns 10% of Irehoe. Jim owns no stock in Smile Corporation. An Irish corporation owns the remaining Irehoe shares. Irehoe reports a profit for the current year of $150,000 and pays no dividends. Irehoe pays no income tax in Ireland because of a tax holiday for newly formed corporations with significant foreign ownership.

Round your answer to one decimal place, if necessary.

What are the tax implications for Smile Corporation, Irehoe, Inc., and Jim?

Smile Corporation and Jim are U.S. shareholders who own more than ________ % of the voting stock of Irehoe, a foreign corporation. For U.S. tax purposes, Irehoe is a controlled foreign corporation .

Also under the new law, a U.S. company owning at least ________ % of a foreign subsidiary must include in income the shareholder’s pro-rata share of the undistributed, nonpreviously-taxed post-1986 foreign earnings and profits (E&P) of the foreign subsidiary. The amount included is net of any aggregate foreign earnings and profits deficits. The portion of the E&P that is cash or cash equivalents is taxed at a reduced rate of _______ % while any remaining E&P is taxed at ______ %.

Answer 1

Smile corporation and Jim are U.S. shareholders who own more than 50% of the voting stock of Irehoe, a foreign corporation. For U.S. Tax purposes, Irehoe is a controlled foreign corporation.

Also under the new law, a U.S. company owing at least 10% of a foreign subsidiary must include in income the shareholder's pro-rate share of the undistributed, non previously taxed post 1986 foreign earnings and profits of the foreign subsidiary. the amount include is net of any aggregate foreign earnings and profits deficit. The portion of the E&P that is cash or cash equivalent is taxed at a reduced rate of 15.5% while any remaining E&P is taxed at 8%