Spartan Corporation, a U.S. corporation, reported $2 million of pretax income from its business operations in Spartania, which were conducted through a foreign branch. Spartania taxes branch income at 15 percent, and the United States taxes corporate income at 21 percent.
Required:
a. If the United States provided no mechanism for mitigating double taxation, what would be the total tax (U.S. and foreign) on the $2 million of branch profits?
b. Assume the United States allows U.S. corporations to exclude foreign source income from U.S. taxation. What would be the total tax on the $2 million of branch profits?
c. Assume the United States allows U.S. corporations to claim a deduction for foreign income taxes. What would be the total tax on the $2 million of branch profits?
d-1. Assume the United States allows U.S. corporations to claim a credit for foreign income taxes paid on foreign source income. What would be the total tax on the $2 million of branch profits?
d-2. Assume the United States allows U.S. corporations to claim a refundable credit for foreign income taxes paid on foreign source income. What would be your answer if Spartania taxed branch profits at 30 percent?

A. = (15% X $2M) + (21% X $2M) = $720,000. Since there is no mechanism for mitigating double taxation, the branch profit will be taxed on the to tax rate of 15% and 21% which is $300,000 and $420,000.

B. The total tax for $2m branch profit if US corporations can remove foreign based profit from US taxation will be just the 15% x $2m = $300,000.

C.If they are allowed to take deductions for foreign income taxes, the total tax on the $2m branch profit will be (21% -15%) x $2m = $120,000.

Explanation:

D.1. If credit are allowed for foreign income tax paid, total tax will be ($2m - $300,000 been foreign tax paid) x 21% = $357,000

D.2.

If the charge foreign income taxes at 30% and US corporations can claim refundable credit for foreign income tax paid on foreign source income = ($2m - $300,000 been the foreign income tax paid) = $1 700,000 x 30% = $510,000