Munder Difflin Paper Company is a U.S. corporation that is a regional paper- and office-supply distributor with an emphasis on servicing small-business clients. Following a substantial expansion of its business, Munder Difflin has U.S.-source income of $300 million and foreign-source income of $200 million. Munder Difflin paid $40 million in foreign taxes. The U.S. tax rate is 35%.
a. How much U.S. tax and total worldwide tax will Munder Difflin pay after taking into account any foreign tax credits to which it is entitled?
b. Now suppose that Munder Difflin’s foreign taxes were instead $70 million. How much U.S. tax and total worldwide tax will Munder Difflin pay after taking into account any foreign tax credits to which it is entitled?
c. Now suppose that Munder Difflin’s foreign taxes were instead $100 million. How much U.S. tax and total worldwide tax will Munder Difflin pay after taking into account any foreign tax credits to which it is entitled?
d. Continuing with part c with $100 million of foreign taxes, suppose that Munder Difflin was able to undertake a tax-planning strategy that would reclassify $60 million of U.S.-source income to foreign-source income. The reclassification would, however, affect both the U.S. classification of income and the foreign classification of income. In other words, U.S.-source income would decrease by $60 million under both the U.S. rules and under the foreign rules, and foreign-source income would increase by $60 under both the U.S. rules and the foreign rules. At the average foreign tax rate of 50%, the tax-planning strategy will increase the amount of foreign taxes paid by $30 million to $130 million. With this strategy, how much U.S. tax and total worldwide tax will Munder Difflin pay after taking into account any foreign tax credits to which it is entitled?
e. Again continuing with part c with $100 million of foreign taxes, suppose Munder Difflin was able to undertake a tax-planning strategy that would reclassify $60 million of U.S.-source income to foreign-source income. The reclassification would, however, affect only the definition of U.S.-source and foreign-source income for U.S. purposes. The reclassification does not affect the taxes Munder Difflin pays to any foreign jurisdiction. With this strategy, how much U.S. tax and total worldwide tax will Munder Difflin pay after taking into account any foreign tax credits to which they are entitled?