Spartan Corporation, a U. S. corporation, reported $5.4 million of pretax income from its business operations in Spartania, which were conducted through a foreign branch. Spartania taxes branch income at 15 percent, and the United States taxes corporate income at 21 percent. Required: a. If the United States provided no mechanism for mitigating double taxation, what would be the total tax (U. S. and foreign) on the $5.4 million of branch profits

Total Income $5.4 million of branch profits ... 5,400,000

Spartania tax at 15 percent ... 810,000

United States tax at 21 percent ... 1,134,000

Total Tax (810,000+1,134,000) ... 1,944,000

Explanation:

Since Spartan Corporation, is a U. S. corporation, and has reported $5.4 million of pretax income from its business operations in Spartania; If Spartania taxes branch income at 15 percent, and the United States taxes corporate income at 21 percent. and there is no mechanism for mitigating double taxation, then the total tax (U. S. and foreign) on the total income would be an addition of both taxes.

Total Income $5.4 million of branch profits ... 5,400,000

Spartania tax at 15 percent ... 810,000

United States tax at 21 percent ... 1,134,000

Total Tax (810,000+1,134,000) ... 1,944,000

In the event of a bilateral tax agreement or tax treaty, an arrangement between two countries which avoids the problem of double taxation, could have allowed Spartan to pay only a total of 21% which is the U. S. Tax rate