Eiffel Corporation is a 100-percent owned French subsidiary of Tower Corporation, a U.S. corporation. During the current year, Eiffel paid a dividend of €500,000 to Tower. Assume an exchange rate of €1 = $1.50. Withholding taxes of €2,500 were imposed on the dividend. The dividend is paid out of earnings and profits that have not been subject to the deemed dividend rules under subpart F or GILTI. Compute the tax consequences to Tower as a result of this dividend.

Eiffel Corporation

Computation of the tax consequences to Tower:

Withholding tax = €2,500 x $1.50 = $3,750.00

Domestic Corporation tax =             156,712.50

Total tax consequence =              $160,462.50

Explanation:

a) Data and Computations:

Dividend =        €500,000

Withholding tax = €2,500

Net after w/tax = €497,500

Exchange rate = €1 = $1.50

Therefore, net dividend after withholding tax = €497,500 x $1.50

= $746,250

Corporation tax rate = 21% of $746,250

= $156,712.50

Tower will suffer a withholding tax burden of $3,750 when translated into dollars and a corporation tax on income totalling $156,712.50 based on the TCJA tax rate of 21% instead of the former 35%.

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