Carolina Industries is a U.S. corporation with a wholly owned Argentinean subsidiary that has $400 million of accumulated earnings and profits. Carolina Industries has in the past reinvested foreign income in the country where it was earned but is reassessing this policy. Assume Carolina Industries can obtain a 20% pre-tax return in the United States, where the tax rate is 35%, or it can obtain a 15% pre-tax return by investing in a 10-year project in Argentina, where the tax rate is 25%, and then repatriating any earnings and profits to the United States.
a. Should Carolina Industries have its Argentinean subsidiary repatriate its earnings and profits or reinvest them in Argentina? Specifically, what is the after-tax (including taxes on repatriation) accumulation to Carolina Industries under the two choices after the 10 years?
b. Continue from part a, except assume the investment horizon is 20 years. Does the longer investment horizon affect your decision of whether to repatriate now or reinvest in Argentina? Would any investment horizon affect your decision?
c. Continue from part a, except assume that the firm has no decent active investment opportunities. Instead, the firm can invest in passive assets that will generate a pre-tax return of 12% whether they are held in the United States or in Argentina. The income from any such passive investments in Argentina will produce Subpart F income, although the original $400 million of accumulated earnings and profits were not Subpart F income. Does the Subpart F income affect your decision of whether to repatriate now or reinvest in Argentina? What is the after-tax accumulation (including taxes on repatriation) to Carolina Industries under the two choices after the 10 years?
d. Continue from part a, except assume that instead of an Argentinean subsidiary, Carolina Industries owns a Danish subsidiary that faces a 45% Danish tax rate and has access to an investment that will generate a 24% pre-tax return. Should Carolina Industries have its Danish subsidiary repatriate its earnings and profits or reinvest them in Denmark? What is the after-tax accumulation (including taxes on repatriation) to Carolina Industries after the 10 years?
e. Continue from part a, except assume that at the beginning of year 10, Congress reduces the U.S. corporate tax rate from 35% to 22%. Does this change affect your decision to reinvest versus repatriate? What is the after-tax (including taxes on repatriation) accumulation to Carolina Industries under the two choices after the 10 years?