Question

Caragua Corporation’s foreign subsidiaries generated aggregate before-tax income of $ 42,000,000 in the current year, upon which they paid corporate income tax at an average rate of 15 percent. Caragua’s foreign subsidiaries had an aggregate amount of property, plant, and equipment of $ 280,000,000.

Required:

a. Determine the amount of global intangible low-taxed income (GILTI) Caragua was required to report in its U.S. taxable income in the current year.

b. Determine the amount of U.S. tax liability related to GILTI in the current year.

Answer 1

a.

Calculation of GILTI

Tested income $42,000,000

Less: Specified return

QBAI x Rate of return ($280,000,000 x 10%)   28,000,000

Excess $14,000,000

Less: 50% deduction   7,000,000

GILTI included in U.S parent’s taxable income   $7,000,000

b.

Calculation of U.S. tax liability on GILTI

The amount of foreign tax actually paid on the amount of GILTI included in Caragua’s taxable income was $1,050,000 ($7,000,000 x 15%). Caragua is allowed an FTC related to the GILTI of $840,000 ($1,050,000 x 80%). As a result, the company’s net U.S. tax liability related to its current year GILTI is determined as follows:

GILTI $7,000,000

Multiplied by: U.S. corporate income tax rate   x 21%

U.S. tax liability before FTC $1,470,000

Less: FTC allowed   (840,000)

Net U.S. tax liability   $ 630,000