Elmo Inc. is a U.S. corporation with a branch office in foreign country Z. During the current year, Elmo had $340,000 of U.S. source income and $60,000 of foreign source income from Z, on which Elmo paid $28,000 of country Z income tax.
a. Calculate Elmo’s U.S. tax liability before foreign tax credit, maximum foreign tax credit allowable, and net U.S. tax liability after foreign tax credit.
b. If Elmo had paid only $10,000 of country Z income tax, calculate Elmo’s foreign tax credit allowable and net U.S. tax liability after foreign tax credit.
c. For which fact situation (foreign tax of $28,000 or $10,000) could Elmo have reduced its worldwide tax burden by operating in country Z using a foreign subsidiary rather than a branch operation? Explain briefly.