Question

The subsidiary of a U.S. corporation located in Country Y generated income of $1,000,000 on which it paid $400,000 (40%) in taxes to Country Y. The subsidiary paid a dividend to the U.S. parent of $54,000. How much tax is currently owed to the U.S. government if the federal tax rate is 35%

Answer 1

The tax currently owed to the U.S. government is:

$18,900

Step-by-step explanation:

a) Data and Calculations:

Income generated by the foreign subsidiary = $1,000,000

Tax paid by the subsidiary in its country of residence = $400,000

Dividend paid to the U.S. parent = $54,000

Federal tax rate = 35%

Tax on the dividend = $18,900 ($54,000 * 35%)

b) The dividend of $54,000 is a foreign-source income earned by a U.S. parent corporation. This is this amount that will be subject to tax in the U.S. and not the net income of the subsidiary.