Ocean, Inc., produces inventory in its foreign manufacturing plants for sale in the United States. Its foreign manufacturing assets have a tax book value of $7 million and a fair market value of $15 million. Its assets related to the sales activity have a tax book value of $600,000 and a fair market value of $200,000. Ocean’s interest expense totaled $80,000 for the current year.
a. What amount of interest expense is allocated and apportioned to foreign-source income using the tax book value method?
What amount of Ocean’s interest expense is allocated and apportioned to foreign-source income using the fair market value method?
b. If Ocean wishes to maximize its FTC, which method should it use?
Explain why an income tax treaty between the United States and Germany can be very favorable to a U.S. person who earns investment or business income from Germany.
Describe the different approaches used by countries to tax the earnings of their citizens and residents generated outside the borders of the country.