Ithaca Snowboards Corporation is a large U.S. producer of in-style winter recreational equipment and apparel. Ithaca Snowboards currently has its primary facilities in the United States as well as distribution and marketing operations in a wholly owned Liechtenstein subsidiary. To expand into Asia, Ithaca Snowboards is considering setting up distribution and marketing operations in Japan. Currently, Ithaca Snowboards has $150 million of U.S. taxable income per year; its Liechtenstein subsidiary generates $100 million of Liechtenstein-source income, none of which is repatriated to Ithaca Snowboards. For simplicity, assume that if Ithaca Snowboards makes no changes, its income streams will continue in perpetuity. Ithaca Snowboards faces a 35% U.S. tax rate and a 15% Liechtenstein tax rate.
a. What is Ithaca Snowboards’ U.S. tax liability, and what is its worldwide tax liability?
b. Now suppose that, to meet payments on its debt and to pay dividends to its shareholders, it is necessary for Ithaca Snowboards to make its Liechtenstein subsidiary repatriate all of its earnings to Ithaca Snow- boards each year. What will be Ithaca Snowboards’ U.S. tax liability and its worldwide tax liability?
c. Continuing from part b, now suppose that Ithaca Snowboards also sets up operations in a Japanese subsidiary. Assume that such operations will pay tax at a 45% Japanese tax rate and will generate an additional $80 million of income, all Japanese source. Assume that unlike the Liechtenstein subsidiary, the Japanese subsidiary repatriates none of its income. What will be Ithaca Snowboards’ U.S. tax liability and its worldwide tax liability?
d. Continuing from part c, now assume that the Japanese subsidiary does repatriate all of its earnings each year. What will be Ithaca Snowboards’ U.S. tax liability and worldwide tax liability?