McGraw-Hill's Taxation of Business Entities 3rd Edition by Connie Weaver, Brian Spilker, Edmund Outslay, John Robinson, Ronald Worsham, Benjamin Ayers, John Barrick

Exercise 4

Chapeau Company, a U.S. corporation, operates through a branch in Champagnia. The source rules used by Champagnia are identical to those used by the United States. For 2011, Chapeau has $2,000 of gross income, $1,200 from U.S. sources and $800 from sources within Champagnia. The $1,200 of U.S. source income and $700 of the foreign source income are attributable to manufacturing activities in Champagnia (general category income). The remaining $100 of foreign source income is passive category interest income. Chapeau had $500 of expenses other than taxes, all of which are allocated directly to manufacturing income ($200 of which is apportioned to foreign sources). Chapeau paid $150 of income taxes to Champagnia on its manufacturing income. The interest income was subject to a 10 percent withholding tax of $10. Assume the U.S. tax rate is 35%. Compute Chapeau's allowable foreign tax credit in 2011.