Question

Global Technology has a wholly owned foreign subsidiary in India. The subsidiary earns 1.5 billion Rupee per year before taxes in India. The foreign income tax rate is 40%. The subsidiary repatriates the entire after-tax profits in the form of dividends to the Global Tech parent company. The U.S. corporate tax rate is 20% of foreign earnings before taxes, but there is an 80% tax credit on the foreign taxes paid. The current exchange rate is 1 Rupee = 0.013 USD

What is the net amount after-tax that Global Tech will realize in the US in Rupee and US Dollars?

Answer 1

Earnings before tax in india = 1.5 billion

Tax in india = 1.5 billion * 40% = 0.6 billion

Earnings after tax in india= 1.5 billion - 0.6 billion = 0.9 billion

Tax in USA Is 20% on earnings before tax

Tax in usa = 1.5 billion * 20% = 0.3 billion

Tax credit in USA. = 80% of tax credit on foregin tax paid = 0.6 billion * 80% = 0.48 billion

Here the tax credit is more than the tax liability in USA ,so the tax credit is restricted to the tax liability in USA.

Tax liability in usa = 0.30 billion

Tax credit is 0.48 billion restricted to 0.30 billion = 0.30 billion

Net tax liability = 0 (0.30-0.30)

So, the profit after tax in USA =₹ 0.9 billion in Rupees

Profit after tax in USA = ₹ 0.9 billion * 0.013 = $ 0.00117 dollers