Tax credits A U.S.

- based MNC's has a foreign subsidiary that earns $250,000 before

taxes, with all the after-tax funds to be available to the parent in the form of dividends.
The applicable taxes consist of a 33% foreign income tax rate, a foreign dividend
withholding tax rate of 9%, and a U.S. tax rate of 34%. Calculate the net funds available
to the parent MNC if: a. foreign taxes can be applied as a credit against the MNC's U.S.
tax liability. b. No tax credits are allowed.
MNC’s receipt of dividends can be calculated as follows:
Subsidiary income before local taxes $250,000
Foreign income tax at 33% 82,500
Dividend available to be declared $167,500
Foreign dividend withholding tax at 9% 15,075
MNC’s receipt of dividends $152,425

(a) If tax credits are allowed, then the so­called “grossing up” procedure will be applied:
Additional MNC income $250,000
U.S. tax liability at 34% $85,000
Total foreign taxes paid (credit)
 ($82,500  $15,075) (97,575) (97,575)
U.S. taxes due 0
Net funds available to the MNC $152,425
(b) If no tax credits are permitted, then:
MNC’s receipt of dividends $152,425
U.S. tax liability ($152,425  0.34) 51,825
Net funds available to the MNC $100,600