To solve this problem, we need to first calculate the tax liability for the U.K. earnings. The U.K. corporate income tax rate is 30%, and the taxable income from operations in the U.K. is $2,000,000. Therefore, the tax owed to the U.K. government is:
Tax Owed to U.K. Government = Tax Rate * Taxable Income = 0.3 * $2,000,000 ≈ $600,000
Next, we need to use the Foreign Tax Credit to determine the amount of U.S. tax owed. The corporation can claim a Foreign Tax Credit for taxes paid to the U.K. government on earnings generated overseas. The Foreign Tax Credit is calculated as:
Foreign Tax Credit = U.S. Income Tax / (U.S. Income Tax + Foreign Tax Paid)
In this case, the U.S. income tax rate is 35%, so we can calculate the U.S. tax owed on the $2,000,000 of taxable income generated in the U.K.:
U.S. Income Tax = 35% * $2,000,000 = $700,000
To calculate the Foreign Tax Credit, we need to know the U.S. income tax and the amount of tax the corporation paid to the U.K. for the same income. Since the U.K. income tax rate is lower than the U.S. rate, we will need to use the limit on the Foreign Tax Credit. The limit is equal to the amount of U.S. tax, which in this case is $700,000. So, the Foreign Tax Credit is:
Foreign Tax Credit = $700,000 / ($700,000 + $600,000)
Foreign Tax Credit ≈ 0.6193
Therefore, the amount of tax owed to the U.S. government on the income generated in the U.K. is:
Tax Owed to U.S. Government = U.S. Income Tax - Foreign Tax Credit = $700,000 - ($700,000