Question

Chapeau Company, a U.S. corporation, operates through a branch in Champagnia. The source rules used by Champagnia are identical to those used by the United States. For 2017, Chapeau has $9,200 of gross income, $5,520 from U.S. sources and $3,680 from sources within Champagnia. The $5,520 of U.S. source income and $3,220 of the foreign source income are attributable to manufacturing activities in Champagnia (general category income). The remaining $460 of foreign source income is passive category interest income. Chapeau had $2,300 of expenses other than taxes, all of which are allocated directly to manufacturing income ($920 of which is apportioned to foreign sources). Chapeau paid $690 of income taxes to Champagnia on its manufacturing income. The interest income was subject to a 10 percent withholding tax of $46. Assume the U.S. tax rate is 35 percent. Compute Chapeau's allowable foreign tax credit for 2017.

Answer 1

	U.S. Sorce income	foreign income	Interest income
Income	5520	3220	460
Less: Expenses	1380(2300-920)	805(920*3220/3680)	115(920*460/3680)
Income chargeable to tax	4140	2415	345

Tax rate = 35%

Total income = 4140+2415+345=6900

Tax= 6900*35% = 2415

Calculation of foreign tax credit

Step:1 : Foreign taxes paid = 690+46 = 736

Step:2 : Tax to be paid = 6900*35% = 2415

Step:3 : Tax credit limit = Total tax payable* Foriegn income/ Total income

=2415*2760/6900 =966

Step:4 : Step:1 or Step:3 whichever is lower

Allowable foreign tax credit = 736

Therfore allowable tax credit = 736