Growco, a domestic corporation, is a manufacturer. Growco is planning to build a new production facility and has narrowed down the possible sites for this new plant to either Happystan (a low tax foreign country) or Sadstan (a high tax foreign country). Growco will structure the new facility as a wholly-owned foreign subsidiary, Sproutco, and finance Sproutco solely with an equity investment. Growco projects that Sproutco’s results during first year of operations will be as follows:
Cost of goods sold (290,000)
Selling, general and administrative expenses (60,000)
Income before income tax $50,000
Assume that the US corporate tax rate is 21%, the Happystan rate is 10%, and the Sadstan rate is 30%. Further assume that neither Happystan nor Sadstan imposes withholding taxes on interest or royalty payments paid by a local subsidiary to its US. parent company.
Compute the total tax rate (US plus foreign) on Sproutco’s profits under the following assumptions:
1. The new production facility is located in Happystan
2. The new production facility is located in Sadstan
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