Question

Table: Ouyang Inc. Financial Information

Financial Information	2013	2012	2011
Before-tax income Domestic	182,932	192,839	192,083
Before-tax income Foreign	78,293	73,622	56,239
	261,225	266,461	248,322
Current Income Taxes:
Federal	27,382	26,372	28,912
Foreign	3,894	2,839	3,428
	31,276	29,211	32,340
Deferred Income Taxes:
Federal	(2,738)	372	623
Foreign	372	928	823
	(2,366)	1,300	1,446
Total	28,910	30,511	33,786

Which of the following is true about the effective tax rate on foreign income:

a)	the highest rate was in 2011;

b)	the highest rate was in 2012;

c)	the highest rate was in 2013;

d)	the lowest rate was in 2013;

e)	the rates were the same for all years;

Answer 1

Firsly we need to calculate effective tax rate on foreign income for all the three years which is shown as follows:-

Effective tax rate will include both current tax and deferred tax.

Effective Tax rate for 2013 = (Current Income taxes+Deferred Income Taxes)/Before Tax Income Foreign

= ($3,894+$372)/$78,293 = $4,266/$78,293 = 0.0545 or 5.45%

Effective Tax rate for 2012 = (Current Income taxes+Deferred Income Taxes)/Before Tax Income Foreign

= ($2,839+$928)/$73,622 = $3,767/$73,622 = 0.0512 or 5.12%

Effective Tax rate for 2011 = (Current Income taxes+Deferred Income Taxes)/Before Tax Income Foreign

= ($3,428+$823)/$56,239 = $4,251/$56,239 = 0.0756 or 7.56%

As it can be seen from the above calculations that highest effective tax rate on foreign income was 7.56% for 2011.

Therefore the correct option is a) the highest rate was in 2011.