California Cars is a U. S. manufacturer of electric cars. California Cars has $ 5 billion of U.S. taxable income—$ 4 billion of which is U.S.- source income and $ 1 billion of which is foreign- source income. California Cars faces a U.S. tax rate of 35% and paid foreign taxes of $ 280 million. The firm’s foreign-source income falls in the general basket. It is the first year of California Cars’ foreign operations, so don’t worry about foreign tax credit carry forwards or carry backs.
a. What is California Cars’ foreign tax credit, and what is its worldwide tax paid for the year?
b. Now suppose that California Cars engaged in tax- reduction strategies abroad, reducing its foreign taxes to $ 200 million but holding all else constant. What is California Cars’ foreign tax credit, and what is its worldwide tax paid for the year?
c. What possible benefit might California Cars receive from reducing its foreign taxes paid in part b? In particular, suppose that the foreign country in which California Cars operates is likely to enact a dramatic increase in its tax rate next year.