| | Problem 15.2 Pacific Jewel Airlines (Hong Kong) |
| | Pacific Jewel Airlines is a U.S.-based air freight firm with a wholly owned subsidiary in Hong Kong. The subsidiary, Jewel Hong Kong, has just completed a long-term planning report for the parent company in San Francisco, in which it has estimated the following expected earnings and payout rates for the years 2011–2014. |
| | The current Hong Kong corporate tax rate on this category of income is 16.5%. Hong Kong imposes no withholding taxes on dividends remitted to U.S. investors (per the Hong Kong-United States bilateral tax treaty). The U.S. corporate income tax rate is 35%. The parent company wants to repatriate 75% of net income as dividends annually. |
| | a. Calculate the net income available for distribution by the Hong Kong subsidiary for the years 2011–2014. |
| | b. What is the amount of the dividend expected to be remitted to the U.S. parent each year? |
| | c. After estimating the theoretical U.S. tax liability on the expected dividend (what is often termed gross-up in the U.S.), what is the total dividend after tax, including all Hong Kong and U.S. taxes, expected each year? |
| | d. What is the effective tax rate on this foreign-sourced income per year? |
| | Country | | Hong Kong | | United States |
| | Corporate income tax rate | | 16.5% | | 35.0% |
| | Dividend payout rate | | 75.0% |
| | Withholding tax on dividends | | 0.0% |
| | Jewel Hong Kong Income Items (millions US$) | | 2011 | | 2012 | | 2013 | | 2014 |
| | Earnings before interest and taxes (EBIT) | | 8,000 | | 10,000 | | 12,000 | | 14,000 |
| | Less interest expenses | | (800) | | (1,000) | | (1,200) | | (1,400) |
| | Earnings before taxes (EBT) | | 7,200 | | 9,000 | | 10,800 | | 12,600 |
| | Less Hong Kong corporate income taxes |
| | a. Net income |
| | Retained earnings |
| | Dividend remitted to U.S. parent |
| | United States Taxation: Grossup | | 2011 | | 2012 | | 2013 | | 2014 |
| | Gross dividend remitted |
| | Less withholding taxes | | - | | - | | - | | - |
| | b. Net dividend remitted |
| | Add back proportion of corp income tax |
| | Add back withholding taxes paid | | - | | - | | - | | - |
| | Grossed-up dividend for US tax purposes |
| | Theoretical US tax liability |
| | Foreign tax credits (FTCs) |
| | Additional US taxes due? |
| | Excess foreign tax credits? | | - | | - | | - | | - |
| | c. Net dividend, after-tax |
| | Total taxes paid on this income |
| | Income before tax |
| | d. Effective tax rate |
| | (taxes paid/income before tax) |
chamankaka1
Q15-2_HW1.xlsx
