INTERNATIONAL BUSINESS 200 Name: Discussion Section Number:

Spring 2013 International Taxation Worksheet

Answer Key 3M, the U.S. company that applies innovative technology to manufacture diversified industrial and consumer products, has a strong global presence. Among the 200 countries where 3M sells its products, Germany and China are quite strong for the firm. Assume 3M has two wholly owned, and foreign incorporated, subsidiaries in those nations: 3M Germany and 3M China. Last year (2011) 3M Germany earned 400,000,000 USD and 3M China 600,000,000 USD (both figures are pretax earnings). Suppose these two subsidiaries paid out all after-tax earnings back to the parent company, 3M U.S., headquartered in St. Paul, MN, in the form of dividend. Please use the tax rates below for calculations: U.S. corporate tax rate: 35% German corporate tax rate: 40% German dividend withholding tax: 0% Chinese corporate tax rate: 25% Chinese dividend withholding tax: 10% 1. How much corporate tax did 3M Germany pay to the German government? 400,000,000 x 40% = $160 million 2. How much corporate tax did 3M Germany pay to the U.S. government? $0 3. How much tax did 3M U.S. pay to the German government for receiving the dividend from 3M-Germany? (400,000,000 - 160,000,000) x 0%= $0 4. What kind of tax credit (direct or indirect) could 3M U.S. get from the payments 3M Germany made in question 1? Indirect 5. How much tax did 3M U.S. owe the U.S. government for its earnings from 3M Germany after all the tax credits are applied? (Note: The figure could be negative to account for effect on overall tax liability.) 400,000,000 x 35% - 400,000,000 x 40% - 0 = - $20 million 6. How much corporate tax did 3M China pay to the Chinese government? 600,000,000 x 25% = $150 million 7. How much dividend did 3M China send back to its parent company, 3M U.S.? 600,000,000 - 150,000,000 = $450 million

INTERNATIONAL BUSINESS 200

Spring 2013

Name: Discussion Section Number:

International Taxation Worksheet

8. How much tax did 3M U.S. pay to the Chinese government for receiving the above dividend from 3M China? 450,000, 000 x 10% = $45 million 9. What kind of tax credit (direct or indirect) could 3M US get from the payment it made in question 8? Direct 10. How much tax did 3M U.S. owe the U.S. government for the income earned by 3M China after all tax credits were applied? 600,000,000 x 35% - 150,000,000- 45,000,000 = $15 million 11. Compare the answers in questions 5 and 10. Briefly explain why one is a positive number while the other is negative? The corporate tax rate in Germany is higher than the U.S. tax rate and, therefore, foreign tax credits are created. Tax liability in the US on Chinese earnings is higher than tax credits from corporate tax and dividend withholding tax in China 12. Assume 3M US earned pre-tax earnings of 1,300,000,000 USD in 2011. What was the tax liability in the U.S. for these earnings? 1,300,000,000 x 35% = $455 million 13. Assume 3M had excess total foreign tax credits for 2011. Would it be able to apply these credits to taxes owed on its domestic corporate income, which was calculated in number 12 above? Why or why not? 3M could apply the excess foreign tax credits to foreign income tax liabilities in a different year (subject to FASB regulations), but it could not apply the foreign tax credits towards tax liabilities on its U.S. domestic earnings. End.