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Luzon is a U.S.

-based multinational manufacturing firm, with wholly owned subsidiaries


in Brazil, Germany, and China, in addition to domestic operations in the United States.
Luzon is traded on the NADAQ. Luzon currently has 650,000 shares outstanding. The
basic operating characteristics of the various business units is as follows:

(000s, local USA (dollars $) Brazil (reais, Germany China (yuan, Y)


currency) R$) (euros, e)
Earnings before $4,500 R$6,250 €4,500 Y2,500
tax (EBT)
Corporate 35% 25% 40% 30%
income tax rate
Average - R$1.80/$ €0.7018/$ Y7.750/$
exchange rate
for period

Luzon’s Earnings and Global Taxation. All MNEs attempt to minimize their global tax
liabilities. Return to the original set of baseline assumptions and answer the following
questions regarding Luzon’s global tax liabilities.

a. What is the total amount-in US dollars- which Luzon is paying across its global
business in corporate income taxes?
b. What is Luzon’s effective tax rate on a global basis (total taxes paid as a
percentage of pre-tax profits)?
c. What would be the impact on Luzon’s EPS and global effective tax rate if
Germany instituted a corporate tax reduction to 28%, and Luzon’s earning before
tax in Germany rose to €5,000,000