Question

7

-Assume that GoGo Co is a U.S. company which has a branch in Peru where the corporate income tax rate is 28%.

-The U.S. corporate income tax rate is 35%.

-GoGo has foreign source income in Peru of $50,000.

               -GoGo pays $18,500 of corporate income tax in Peru and $20,000 of other taxes.

-GoGo decides to do a calculation to choose between using taxes paid in Mexico as a deduction or tax credit.

question: If GoGo had a choice, should they take a deduction or credit and show calculations

Answer 1

Corporate income tax in U.S. on foreign source income = $50,000*35% = $17,500

If GoGo decides to take tax credit for taxes paid in Peru then:

Net taxes due in U.S. = Corporate income tax in U.S. - tax credit for taxes paid in Peru = $17,500 - $18,500 = -$1,000

If GoGo decides to take deduction for taxes paid in Peru then:

Tax on foreign source income in U.S. = (foreign source income - taxes paid in Peru)*U.S. corporate income tax rate = ($50,000 - ($18,500 + $20,000)*35% = ($50,000 - $38,500)*35% = $11,500*35% = $4,025

As seen from above calculations, GoGo should take tax credit for taxes paid in Peru because in that case their tax in U.S. on foreign source income is none.