Assignment:
Pacific Jewel Airlines (Hong Kong)
Q: 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 |
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Hong Kong |
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United States |
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| Corporate income tax rate |
16.5% |
|
35.0% |
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| Dividend payout rate |
75.0% |
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| Withholding tax on dividends |
0.0% |
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| Jewel Hong Kong Income Items (millions US$) |
|
2011 |
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2012 |
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2013 |
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2014 |
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| Earnings before interest and taxes (EBIT) |
8,000 |
|
10,000 |
|
12,000 |
|
14,000 |
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| Less interest expenses |
(800) |
|
(1,000) |
|
(1,200) |
|
(1,400) |
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| Earnings before taxes (EBT) |
7,200 |
|
9,000 |
|
10,800 |
|
12,600 |
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| Less Hong Kong corporate income taxes |
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| a. Net income |
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| Retained earnings |
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| Dividend remitted to U.S. parent |
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| United States Taxation: Grossup |
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2011 |
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2012 |
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2013 |
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2014 |
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| Gross dividend remitted |
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| Less withholding taxes |
- |
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- |
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- |
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- |
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| b. Net dividend remitted |
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| Add back proportion of corp income tax |
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| Add back withholding taxes paid |
- |
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- |
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- |
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- |
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| Grossed-up dividend for US tax purposes |
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| Theoretical US tax liability |
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| Foreign tax credits (FTCs) |
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| Additional US taxes due? |
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| Excess foreign tax credits? |
- |
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- |
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- |
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- |
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| c. Net dividend, after-tax |
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| Total taxes paid on this income |
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| Income before tax |
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| d. Effective tax rate |
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| (taxes paid/income before tax) |
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