Litchfield Corporation

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Litchfield Corporation makes sales within US and plans to diversify and make exports to UK. Hence a fully owned subsidiary in the UK is ideal. The production cost of Litchfield products is $ 15 per unit and the prospected price shall be $25 per unit making a profit of $10.when the corporation decides to sell to UK subsidiary thee same price as production, it will not make any profit in the US and therefore it will not have any income tax. However in UK, the sales will earn a $10 of profit. UK has lower tax rate and the corporation opts to pay the rate here compared to the US as it is lower thus Income tax in UK is 28% which is less with 7% compared to US. Any small consideration given to tax issues, will offer Litchfield Corporation as the US exporter the opportunity to reduce the income tax liability and positively helping them to sidestep foreign income tax liability.

Litchfield Corporation should consider the tax issues that relate to UK foreign country income taxation, state income taxation and US federal income taxation. In this case Litchfield Corporation is a US exporter and its exports sales to the foreign buyers is made through subsidiaries in United Kingdom. The IRS demands a sales pricing made by any US exporter to the related party. Therefore the exporters cannot invade income taxation of their profits but can defer it by establishing a subsidiary. When the Litchfield corporation decides to have a subsidiary, it splits its export profits into two thus; the first one, export profit from their sales in the US which is US federal income tax and the second one, export profits from the subsidiary’s sales to the foreign buyers which can only be a subject to US federal tax after it has been distributed in form of dividend.

In addition this corporation can exempt a part of its export profits form the US federal income taxation when it establishes a foreign sales corporation (FSC). The exemption will enable Litchfield Corporation that are FSC shareholders to successfully lower the US federal income tax rate that applies alongside their merged export profits.

References

Ault, H. J., & Bradford, D. F. (1990). Taxing international income: An analysis of the US system

And its economic premises. In Taxation in the global economy (pp. 11-52). University of Chicago Press.

Income tax regulations: Including proposed regulations as of May 1, 2008. (2008). Chicago, IL:

CCH.

Larkins, E. R. (2004). International applications of U.S. income tax law: Inbound and outbound

Transactions. Hoboken, NJ: Wiley.