Question

Theta Corporation is a U.S. based multinational firm in the electronics industry. It has wholly owned subsidiaries in Ireland, where sales and profits for the world outside of the U.S are booked, and in Bermuda, which owns the intellectual property rights for the technology used in Omega products. Below are the tax rates applicable in each country.

U.S. basic corporate tax rate: 21%
Tax on declared dividends of a foreign subsidiary: 0%
Tax on undeclared foreign earnings: 21% with credit for foreign taxes paid
Tax on intangible income (GILTI): 13.125%
Irish corporate tax rate: 12.5%
Bermuda corporate tax rate: 0%

In 2020 Theta Corp. reported these operating profits for its foreign subsidiaries:

Ireland: $6 b with half declared as dividends
Bermuda: $5 b with no dividends declared

(a) What would be Theta’s U.S. tax liability and effective tax rate on this foreign source income?
(b) If the Irish subsidiary declared 100% of its profits as dividends, what would be the U.S. tax liability and effective tax rate?

Answer 1

Chech the following explanation

Step-by-step explanation:

a) Ireland - Theta's US tax liability from Ireland is $3 billion * 21% = $0.63 billion. Effective tax rate on $6 billion will be 0.63 / 6 = 10.5%. Foreign taxes credit will be allowed.

Bermuda - $5 billion * 13.125% = $0.65625 billion with no credit of foreign taxes. The effective rate is 13.125%

b) If the Irish company declares 100% of its profits, there will be no tax and effective US tax rates will be 0%.