Beach, Inc, a domestic corporation, owns 100% of Mountain, Ltd., a manufacturing facility in Erasmus. Mountain has no operations or activities in the United States. The U.S. tax rate is 35% and the applicable Erasmus tax rate is 10%. For the current year, Beach earns $500,000 in taxable income. Mountain earns $300,000 in taxable income from its operations, pays $30,000 in taxes to Erasmus, and
makes no distributions to Beach. What is Beach's effective tax rate for GAAP book purposes, assuming that Beach does not make the permanent reinvestment assumption of ASC 740-30 (APB 23)?
a. 38.75%.
b. 35%.
c. 31.25%.
d. 25.63%.
b
RATIONALE: Beach's total book income is $800,000 . Its current U.S. income tax expense is $175,000 ($500,000 × 35%) and its current Erasmus tax expense is $30,000 . The deferred U.S. tax expense on the Erasmus earnings is $75,000 [($300,000 × 35%) – $30,000 FTC]. Thus, Beach's total tax expense is $280,000 ($175,000 + $30,000 + $75,000) and its ETR is 35% ($280,000/$800,000).
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