International Corporate Finance for Peripatetic Enterprises
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Peripatetic Enterprises, a U.S import-export trading firm, is considering its international tax situation. U.S tax law requires U.S corporations to pay taxes on their foreign earnings at the same rate profits earned in the United States; this rate is currently 45&. However, a full tax credit is given for the foreign taxes paid up to the amount of the U.S tax liability. Peripatetic has major operations in Poland, where the tax rate is 20%, and in Sweden, where the tax rate is 60%. The profits, which are fully and immediately repatriated, and foreign taxes paid for the current year are below:
POLAND SWEDEN
Earnings before intrest $80 million $100 million
and taxes (EBIT)
Host country taxes paid $16 million $60 million
Earnings before intrest $64 million $40 million
after taxes
a. What is the U.S. tax liability on the earnings from the Polish subsidiary assuming the Swedish subsidiary did not exist?
b. What is the U.S. tax liability on the earnings from the Swedish subsidiary assuming the Polish subsidiary did not exist?
c. Under U.S. tax law, Peripatetic is able to pool the earnings from its operations in Poland and Sweden when computing its U.S. tax liability on foreign earnings. Total EBIT is thus $180 million and the total host country taxes paid is $76 million. What is the total U.S. tax liability on foreign earnings? Show how this relates to the answers in parts (a) and (b).
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Solution Summary
The solution examines international corporate finance for peripatetic enterprises.
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A. $80 million x 45% =$36 million - $16 million = $20 million
B. $100 million x ...
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