Question

Lafferty Company, a U.S. based company (21% tax rate) has a branch in a foreign country,...

Lafferty Company, a U.S. based company (21% tax rate) has a branch in a foreign country, which generated 750,000 foreign currency units (FCU) of pre-tax income. The branch paid it's home country 14% income taxes evenly throughout the year. The branch repatriated 165,000 FCU of after-tax profits to Lafferty on 9/27.

Selected exchange rates for the year: 1/1 = $0.662; 9/27 = $0.633; 12/31 = $0.650; Average for the year = $0.645

Show all labeled and detailed computations for the following items:

(a) U.S. taxable income in U.S. dollars

(b) FTC allowed in U.S. (show complete decision computation)

(c) U.S. net tax liability

Business   Accounting   
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Answer #1

Post tax profit of foreign branch = 750000 * (1-0.14)

=645000

a) US taxable income = 165000 * 0.633 = 104445

b) FTC allowed in US = post tax income of foreign branch = 165000 * 0.633 + (645000 - 165000) * 0.65

= 416445 (note: it is assumed that 165000 will be brought on 9/27 and remaining at the end of the year. However, if it is assumed that all post tax amount will be brought throughout the year, then the answer shall be as under)

645000 * 0.645 = 416025

c) US net tax liability

Under option a) 104445 * 21% = 21933.45

Under option b1) 416445 * 21% =87453.45

Under option b2) 416025 * 21% = 87365.25

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