Molly, Inc., a domestic corporation, owns 15% of PJ, Inc., and 12% of Emma, Inc., both foreign corporations. Molly is paid gross dividends of $35,000 and $18,000 from PJ and Emma, respectively. PJ withheld and paid more than $10,500 in foreign taxes on the $35,000 dividend.
PJ’s country of residence levies a 20% tax on dividends paid to nonresident corporations. However, the tax rate is increased to 30% if the recipient is a resident of a country that provides an FTC. Taxes of $3,600 are withheld on the dividend from Emma.
What tax issues must be considered in determining the availability and amount of the FTC allowed to Molly, Inc.?