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International Taxation for United States Corporation

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Problems:
1. Galaxy Inc, a US Corporation, is engaged in the business of rendering engineering and project management services in Country A. Galaxy also licenses certain Country A patents to clients for use in connection with project in which Galaxy is involved. Country A has no generally applicable income tax. It does, however, impose a withholding tax of 20 percent on gross royalties and a withholding tax of 25 percent on gross fees for services rendered in Country A when such royalties and fees are paid be residents of Country A to foreign persons. The gross royalties and gross services fees are independent tax bases on which each withholding tax is separately computed. No deductions are permitted. Galaxy receives royalties and engineering and project management fees from Clients in Country A from which the 20 and 25 percent taxes are withheld, respectively. Are the withholding taxes creditable by Galaxy?
2. Would the results in Problem 1 be different if Country A has a generally applicable income tax that is not imposed on royalties and fees paid by Country A residents to foreign persons, which are subject to the withholding taxes described?

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The expert examines international taxation for a United States Corporation.

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Question 1
The withholding tax of 20% imposed on gross royalties can be considered as compensation that Galaxy Inc. pays to Country A for the economic benefit of being able to license the patent. Hence, given ...

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