Growco, a domestic corporation, is a tire manufacturer. Growco is planning to build a new production facility, and has narrowed down the possible sites for this new plant to either Happystan (a low tax foreign country) or Sadstan (a high tax foreign country). Growco will structure the new facility as a wholly owned foreign subsidiary, Sproutco, and finance Sproutco solely with an equity investment. Growco projects that Sproutco's results during its first year of operations will be as follows:
Sales $400,000,000
Cost of goods sold (290,000,000)
Selling, general and administrative expenses (60,000,000)
Net profit $50,000,000
Assume that the U.S. corporate tax rate is 35%, the Happystan rate is 20%, and the Sadstan rate is 40%. Further assume that both Happystan and Sadstan impose a 5% withholding rate on dividend distributions, but neither country imposes withholding taxes on interest or royalty payments. Compute the total tax rate (U.S. plus foreign) on Sproutco's profits under the following assumptions:
a.The new production facility is located in Happystan and Sproutco repatriates none of its profits during the first year.