Solved: Gamboa Incorporated is a relatively new U S based

retailer of specialty

Gamboa, Incorporated, is a relatively new U.S.-based retailer of specialty fruits and vegetables.
The firm is vertically integrated with fruit and vegetable-sourcing subsidiaries in Central
America, and distribution outlets throughout the southeastern and northeastern regions of the
United States. Gamboa's two Central American subsidiaries are in Belize and Costa Rica.
Maria Gamboa, the daughter of the firm's founder, is being groomed to take over the firm's
financial management in the near future. Like many firms of Gamboa's size, it has not
possessed a very high degree of sophistication in financial management simply out of time and
cost considerations. Maria, however, has recently finished her MBA and is now attempting to
put some specialized knowledge of U.S. taxation practices to work to save Gamboa money. Her
first concern is tax averaging for foreign tax liabilities arising from the two Central American
subsidiaries.
Costa Rican operations are slightly more profitable than Belize, which is particularly good since
Costa Rica is a relatively low-tax country. Costa Rican corporate taxes are a flat 30%, and there
are no withholding taxes imposed on dividends paid by foreign firms with operations there.
Belize has a higher corporate income tax rate, 40%, and imposes a 10% withholding tax on all
dividends distributed to foreign investors. The current U.S. corporate income tax rate is 35%.
a. If Maria Gamboa assumes a 50% payout rate from each subsidiary, what are the additional
taxes due on foreign-sourced income from Belize and Costa Rica individually? How much in
additional U.S. taxes would be due if Maria averaged the tax credits/liabilities of the two units?
b. Keeping the payout rate from the Belize subsidiary at 50%, how should Maria change the
payout rate of the Costa Rican subsidiary in order to most efficiently manage her total foreign
tax bill?
c. What is the minimum effective tax rate which Maria can achieve on her foreign sourced
income?

ANSWER
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