Acc 312 module seven 1
ACC 312 Module Seven 1
Practice Problems—Module Seven
International Taxation Issues
Exercises 1–4 refer to the following information
Assume a VAT situation where the tax rate is 15 percent, with export sales exempt. The
manufacturer does not purchase inputs on which VAT has been paid, and its net selling
price to the wholesaler before VAT is £250. The wholesaler adds value of £300, and the
retailer adds value of £500 to the consumer.
1. What are the gross and net selling prices at the manufacturer, wholesaler, and retailer
2. How much in VAT is paid to the tax authorities at each level?
3. What is the final amount that the domestic consumer pays, and how much of that is
4. Would your answer to #3 be the same if the retailer were to export the goods instead
of selling them to a domestic consumer?
5. ABC Company has income from the following countries:
Country Type of Operation Gross Earnings Income Tax Rate
United States Parent 500,000 40%
X Branch (10,000) 25%
Y Distribution 120,000 5%
Z 100% owned 400,000 45%
ABC’s subsidiary in Z declares a 40 percent dividend; Z’s withholding tax on
dividends is 5 percent. Both the branch and the distribution facility, which is wholly
owned, retain all earnings. The distribution earnings are considered to be foreignbased
company sales income. What is ABC’s final U.S. tax liability?
6. Puerto International has a branch in Mexico that manufactures a garage door alarm
for people with mountain bike racks that fit on the top of their cars. The subsidiary
earned $800,000 in 2000 before tax, with Mexican corporate tax rates at 40 percent.
Taxes were paid evenly throughout the year. How much income did Puerto have to
include in its U.S. taxable income in 2000, and what was the tax credit?
2 ACC 312 Module Seven
7. In 2000, San Fernando Drilling shipped 300 diamond drill bits to its subsidiary in
Ecuador. The drill bits were shipped at San Fernando’s cost of $1 million each to
avoid Ecuador’s duty of 20 percent. In 2000, Ecuador’s income tax on foreign
subsidiaries was 35 percent, and the U.S. corporate tax rate was 35 percent. In 2001,
Ecuador proposed to raise the corporate tax rate to 45 percent, eliminate duties, and
impose a 10 percent VAT. The U.S. rate would remain the same. What action (if any)
should San Fernando take on its export pricing?