Part I

D, a domestic corporation, has a branch office located within country X. D’s management projects that in the next
taxable year, D will have a pre-tax profit of $1,000, $800 from U.S. operations and $200 from the branch in X.
Assume X taxes corporate income at a rate of 31%, and the United States taxes corporate income at a rate of 21%.

1. If management’s projections are accurate, what will D’s excess credit be in the next taxable year?

Now assume D’s management plans to establish a second foreign branch in country Y. Y taxes corporate income at
a flat rate of 16%. What amount of profits would the branch in Y have to generate in order to eliminate the excess
credit generated by the branch in X?
Each dollar of country Y income will:
Increase FTC limitation by_______________
Increase D’s foreign tax paid by ______________
Excess limitation = __________________

2. The excess limitation of _____ per each dollar of country Y income can be used to reduce the excess FTC of ____
per each dollar of country X income.

To completely eliminate the excess FTC in part 1, country Y branch needs to produce taxable income of
______________

3. Now assume that the rules X uses to source income differ from those used by the United States. For example, X
may use an activity-based sourcing rule for income from inventory sales whereas the United States uses a title
passage rule. Therefore, D may be able to restructure its operations such that a portion of the $800 profit currently
classified as U.S. source income is recharacterized as foreign source income, but only for U.S. tax purposes. How
much of the $800 profit would have to be recharacterized as foreign source income in order to eliminate the excess
credit generated by the country X branch?

Each dollar of resourced income will:

increase D’s FTC limitation by ______ and
has no effect on foreign tax paid to country X.

To completely eliminate the excess FTC in part 1, D needs to resource income of __________

4. How would your answer to #3 change if any resourcing of D’s profits for U.S. tax purposes also increases D’s
taxable income for country X tax purposes?

5. Assume you are a U.S. lawmaker who wishes to prevent U.S. companies from engaging in the type of cross-
crediting referred to in Part 2. What type of foreign tax credit limitation system would prevent cross-crediting
between branches in different countries?

6. If your U.S. and/or foreign firms have a calendar year end, search its/their annual report for the year ending
December 2017 for the impact of the Tax Cut and Jobs Act of 2017.

Part II

A.
B.
C.
D.