Question

Tailor​ Johnson, a U.S. maker of fine​ menswear, has a subsidiary in Ethiopia.

Tailor Johnson, a U.S. maker of fine menswear, has a subsidiary in Ethiopia. This year, the subsidiary reported and repatriated earnings before interest and taxes (EBIT) of 291 million Ethiopian birrs. The current exchange rate is 8.6162 birrs/dollar or S= $0.1161/ birr. The Ethiopian tax rate on this activity is 30%. U.S. tax law requires Tailor Johnson to pay taxes on the Ethiopian earnings at the same rate as on profits earned in the United States, which is currently 37%. However, the United States gives a full tax credit for foreign taxes paid up to the amount of the U.S. tax liability. What is Tailor Johnson's U.S. tax liability on its Ethiopian subsidiary? Tailor Johnson's U.S. tax liability on its Ethiopian subsidiary is $ million. (Round to two decimal places.)

Answer 1

Exchange rate = $0.1161/birr

EBIT (in birr) = 291 million; EBIT (in $) = 291*0.1161 = $33.77 million

Tax paid in Ethiopia = 30%*EBIT = 30%*291 = 87.30 million: Tax paid (in $) = 87.30*0.1161 = $10.13 million

Tax liability in the US = 37%*EBIT = 37%*33.77 = $12.50 million

Company will get a full tax credit of 10.13 million so tax liability remaining = 12.50 -10.13 = $2.36 million