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Wheelco, a foreign corporation




Question;Wheelco, a foreign corporation, manufactures motorcycles for sale worldwide. Wheelcomarkets its motorcycles in the United States through Wheely, a wholly-owned subsidiary that derives all of its income from U.S. business operations. Wheelcoalso has a creditor interest in Wheely, such that Wheely?s debt to equity ratio is 3 to 1,and Wheely makes annual interest payments of $60 million to Wheelco. The results fromWheely?s fi rst year of operations are as follows:Sales $180 millionInterest income $6 millionInterest expense (paid to Wheelco) ($60 million)Depreciation expense ($30 million)Other operating expenses ($81 million)Pre-tax income $15 millionAssume the U.S. corporate tax rate is 35%, and that the applicable tax treaty exemptsWheelco?s interest income from U.S. withholding tax. Compute Wheely?s interest expensededuction.


Paper#41996 | Written in 18-Jul-2015

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