Question

International Taxation Question

PROBLEM 1

Chipco, a U.S. C corporation, bakes the world's best tasting white chocolate chip cookies. In addition to its U.S. sales, Chipco markets its cookies abroad through an extensive network of branch sales offices. Chipco's operating results for the current year are summarized below by source and by type of income:

U.S.-source income.......................................... $60 million

Foreign-source income..................................... $40 million

Worldwide income........................................... $100 million

Chipco paid $15 million of creditable foreign taxes on its net foreign-source income. Assume that the U.S. corporate income tax rate is 21%.

Compute Chipco's foreign tax credit, as well as the amount of excess credits (or excess limitation).

Answer 1

a) calculation of foreign tax credit

b) amount of excess credit

Total tax credit on foreign income. $.15 million

Tax credit utilized while paying current year tax $. 8.4 million

Excess credit available $.6.6 million ($.15- $.8.4)