ZNZ Petroleum ZNZ Petroleum is a U.S.-based multinational petroleum and petrochemical exploitation, production, and distribution company. ZNZ’s subsidiary in Zaire, a new promising area of petroleum exploration is expecting a major “find” in the next two-year period. The tax planning staff in-the corporate headquarters in Shreveport, Louisiana, wish to estimate tax liabilities and effective tax burdens this prospective income three years our. The Zaire currency, the New Zaire (ZRN), is currently trading at ZRN100,000/USD. Although the government claims it is pegged TO the dollar, the stability of the currency is highly questionable. Given that inflation in Zaire has been rising now averaging 20% per year compared to the U.S.’s 3% Per year’„ the tax planning staff would prefer to assume that the currency is likely to weaken over tin…period. In addition to the obvious problems With the Ness, Zaire. the government of Zaire, requires all petroleum companies operating there to TWA over’ all hard-currency earnings to the government. Since oil is sold on world markets in U.S. (dollars, the Zaire an subsidiary’s income actually begins M dollars and is then converted to local currency for tax purposes. ‘Mien the subsidiary declares a dividend to the parent company, it will have to apply to the government to obtain hard-currency. U.S. dollars, for payment to the parent.) ZNZ has estimated the all-in-cost of production per barrel. as well as the estimated barrels produced, for the years 2001-2002. The forecast oil price, which is a company. wide forecast from the corporate headquarters, is used for projecting revenues.
|
ZN2—Za ire |
2000 |
2001 |
2002 |
|
Expected price per barrel(U.S$) |
18.50 |
$19.50 |
S19.00 |
|
Estimated all in -cost per barrel ( US$) |
7.50 |
6.25 |
4.50 |
|
Barrel of all produced(expected) |
1,000,000 |
I0,000,000 |
15,000,000 |
The current Zaire corporate income. tax rate is 50%. In addition, the Zaire tax authorities impose a 20% wit withholding tax cm dividends and interest remitted to foreign resident investors, Zaire has no current set or -bilateral tax treaties, applying the Same rates to all foreign investors regardless of country of origin. The parent company plans to repatriate 50% of net income as dividends annually. Complete the following basic income statement in order to answer the following questions.
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ZNZ—Zaire |
2000 |
2001 |
2002 |
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Expected revenues (USS) |
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Expected revenues (ZRN) |
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Less all-in-costs. production (ZRN) |
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Earnings before tax |
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1ess Zaire corporate income taxes |
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Net income of subsidiary |
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Retained earnings |
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Distributions as divided to parent |
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a. Calculate the expected exchange rate for the 2000 through 2002 period.
b. Calculate the net income available for distribution by the Zaire subsidiary for the years 2000 through 2002, in b, out Zaire and U.S. dollars (assuming-both a fixed and a depreciating Zaire dollar exchange rate)
C. What is the amount of the dividend that is expected to be remitted to the LIS parent each year, after both income and withholding taxes, in U.S. dollars?
d After gross tip For U.S. tax liability purposes, what is the total dividend after-tax (all Zaire and U.S. taxes) expected each year?
c. What is the effective tax rate on this foreign-sourced income per year?