2. Gamboa's Tax Averaging. Gamboa, Incorporated, is a relatively new U.S.-based retailer of specialty fruits and vegetables. The firm is vertically integrated with fruit and vegetable-sourcing subsidiaries in Central America, and distribution outlets throughout the southeastern and northeastern regions of the United States. Gamboa's two Central American subsidiaries are in Belize and Costa Rica. Maria Gamboa, the daughter of the firm's founder, is being groomed to take over the firm's financial management in the near future. Like many firms of Gamboa's size, it has not possessed a very high degree of sophistication in financial management simply out of time and cost considerations. Maria, however, has recently finished her MBA and is now attempting to put some specialized knowledge of U.S. taxation practices to work to save Gamboa money. Her first concern is tax averaging for foreign tax liabilities arising from the two Central American subsidiaries. As shown in the popup window, !, Costa Rican operations are slightly more profitable than Belize, which is particularly good since Costa Rica is a relatively low-tax country. Costa Rican corporate taxes are a flat 30%, and there are no withholding taxes imposed on dividends paid by foreign firms with operations there. Belize has a higher corporate income tax rate, 40%, and imposes a 10% withholding tax on all dividends distributed to foreign investors. The current U.S. corporate income tax rate is 35%. a. If Maria Gamboa assumes a 50% payout rate from each subsidiary, what are the additional taxes due on foreign-sourced income from Belize and Costa Rica individually? How much in additional U.S. taxes would be due if Maria averaged the tax credits/liabilities of the two units? b. Keeping the payout rate from the Belize subsidiary at 50%, how should Maria change the payout rate of the Costa Rican subsidiary in order to most efficiently manage her total foreign tax bill? c. What is the minimum effective tax rate that Maria can achieve on her foreign-sourced income? a. If Maria Gamboa assumes a 50% payout rate from each subsidiary, calculate the additional taxes due or excess foreign tax credits on foreign-sourced income from Belize individually in the following table: (Round to the nearest dollar.) Belize Costa Rica Combined Subsidiary Income Statement Earnings before taxes $ 2,000,000 Less corporate income taxes Net income $ Distributed earnings Less withholding taxes on dividends Net dividend remitted to U.S. parent U.S. Tax Calculation Net dividend remitted $ Withholding income taxes Proportion of foreign income taxes Grossed-up dividend $ Theoretical U.S. tax liability $ Foreign tax credits $ Additional U.S. tax due Excess foreign tax credits $ If Maria Gamboa assumes a 50% payout rate from each subsidiary, calculate the additional taxes due or excess foreign tax credits on foreign-sourced income from Costa Rica individually in the following table: (Round to the nearest dollar.) Subsidiary Income Statement Belize Costa Rica Combined Earnings before taxes $ 2,500,000 Less corporate income taxes Net income $ Distributed earnings Less withholding taxes on dividends Net dividend remitted to U.S. parent U.S. Tax Calculation Net dividend remitted $ Withholding income taxes Proportion of foreign income taxes Grossed-up dividend $ Theoretical U.S. tax liability $ Foreign tax credits $ Additional U.S. tax due $ Excess foreign tax credits Calculate the additional U.S. taxes due if Maria averaged the tax credits/liabilities of the two units in the following table: (Round to the nearest dollar.) Subsidiary Income Statement Belize Costa Rica Combined Earnings before taxes $ 2,000,000 $ (800,000) 2,500,000 (750,000) Less corporate income taxes Net income $ 1,200,000 $ 1,750,000 Distributed earnings 600,000 875,000 Less withholding taxes on dividends (60,000) 0 Net dividend remitted to U.S. parent 540,000 875,000 U.S. Tax Calculation Net dividend remitted 540,000 $ 875,000 $ 0 Withholding income taxes Proportion of foreign income taxes Grossed-up dividend 60,000 400,000 1,000,000 $ 375,000 $ 1,250,000 $ Theoretical U.S. tax liability $ 350,000 $ 437,500 $ Foreign tax credits $ 460,000 $ 375,000 $ Additional U.S. tax due $ 62,500 Excess foreign tax credits $ 110,000 $ b. Keeping the payout rate from the Belize subsidiary at 50%, how should Maria change the payout rate of the Costa Rican subsidiary in order to most efficiently manage her total foreign tax bill? (Select from the drop-down menu.) Maria should (1) payout rate for the Costa Rican subsidiary to equate the cross-credits with the U.S. parent company level and no additional U.S. taxes are due on the remittance and repatriation. c. What is the minimum effective tax rate that Maria can achieve her foreign-sourced income? (Select from the drop-down menu.) The minimum effective tax rate Maria can reach on her foreign-sourced income, assuming something is repatriated from abroad, is (2) 1: Data Table Earnings before taxes Corporate income tax rate Dividend withholding tax rate Belize $2,000,000 40% 10% Costa Rica $2,500,000 30% 0% (2) (1) keep the same increase the decrease the Costa Rica corporate rate of 30% O U.S. corporate rate of 35% Belize corporate rate of 40%