Blackwater Company has a foreign branch that earns income before income taxes of $500,000. Income taxes paid to the foreign government are $150,000 or 30%. Sales and other taxes paid to the foreign government are $100,000. Blackwater Company must include the $500,000 of foreign branch income in determining its home country taxable income. In determining its taxable income, Blackwater can choose between taking a deduction for all foreign taxes paid or a credit only for foreign income taxes paid. The corporate income tax rate in Blackwater’s’ home country is 40%. Determine whether Blackwater would be better off taking a deduction of a credit for foreign taxes paid (FTC).

a. If foreign tax rate increased from 30% to 50%, how would it change your answer?
b. If foreign tax rate decreased from 30% to 10%, how would it change your answer?
b. If parent country’s tax rate decreased from 40% to 20%, how would it change your answer?
c. If local taxes were $250,000, how would it change your answer?

Blackwater Company

a. It is generally better for Blackwater to take a credit for foreign taxes paid than taking it as a deduction.

A good look at the tables below show that from (a) to (c) there is no change in the above answer.

Explanation:

a) Data and Calculations:

Foreign income before taxes = $500,000

Foreign Taxes a deduction from home taxable income:

Foreign     Foreign        FTC as a     Home Tax

Tax Rates  Income        Deduction     Payable  

30%            $500,000  $150,000    $140,000 ($500,000 - $150,000*40%)

50%           $500,000   $250,000   $100,000 ($500,000-$250,000*40%)

10%            $500,000   $50,000     $180,000 ($500,000 - $50,000*40%)

30%           $500,000   $150,000    $70,000 ($500,000 - $150,000*20%)

30%           $500,000   $150,000    $250,000

Foreign Taxes treated as a credit:

Foreign     Foreign                                       FTC as a    Home Tax

Tax Rates  Income        Home Tax (40%)    Credit         Payable

30%            $500,000  $200,000  (40%)   $150,000    $50,000

50%           $500,000   $200,000  (40%)   $250,000  ($50,000)

10%            $500,000   $200,000  (40%)   $50,000     $150,000

30%           $500,000   $100,000   (20%)   $150,000   ($50,000)

30%           $500,000   $250,000  (0%)     $150,000    $100,000

answer; normative economics;

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