Unit 1.2 International tax rules and treaties (13)

Question 1

The business world has become

Answer 1

Globalised, which means a corporation is not restricted to only one country

Question 2

An entity usually pays

Answer 2

corporate tax on their worldwide income in the country of which it is a resident for tax purposes

Question 3

Globalization has corporate taxation implications as

Answer 3

as different countries have different ways of determining the residence of the entity which could mean the entity could end up paying taxation in more than one country (aka double taxation)

Question 4

International tax rules and treaties

Answer 4

resolve the problem of double taxation as it is not fair for an entity to pay taxation twice on the same income

Question 5

Corporate residence can be determined in 3 ways

Answer 5

• The place of incorporation
• The place of effective management
• The place of permanent establishment

Question 6

OECD Model Tax Convention

Answer 6

Where different countries use different methods which can lead to being taxed in two countries, the model suggests that the entity be deemed resident only in country of its effective management

Question 7

The issue in the situation where a holding company receives dividends from a subsidiary company in a different country is that

Answer 7

the dividend paid by subsidiary is paid out of after tax profits and the withholding tax is paid by subsidiary on those dividends. This dividend in the hands of the holding company forms part of its income and will be taxed

Question 8

Two types of taxes

Answer 8

• Withholding taxes (WHT) – this is a tax that as to be paid by the subsidiary in the country of its residence out of the gross dividend payable to the holding company that is resident in a different country. The net dividend is the paid to the holding company.
• Underlying tax (ULT) – this is the tax that has already been paid out of the profit for the year before the dividend is paid out of the profits after tax

Question 9

Withholding taxes (WHT) can be calculated in two ways

Answer 9

• If the gross dividend is given:
  WHT = gross dividend X percentage WHT / 100
• If the net dividend is given (actual payment made to holding company):
  WHT = net dividend X percentage WHT / (100 - WHT percentage)

Question 10

ULT on the dividend =

Answer 10

= Gross dividend (the dividend paid by the foreign company before WHT)
X tax actually paid (by the foreign subsidiary company)
/ company’s profits after tax

Question 11

There are 3 methods for providing double tax relief

Answer 11

• Tax exemption method – Simple method that exempts the dividends received by the holding company from its taxable income
• Deduction method – Net dividend received from the subsidiary is taxed in the hands of the holding company
• Tax credit method – Most complicated method. The OECD Model Tax Convention recommends the use of this method for double tax relief

Question 12

With the tax credit method the tax payable by the holding company is calculated as follows

Answer 12

= Net dividend paid by the subsidiary net of WHT
+ WHT
+ ULT
= Gross dividend taxable in the hands of the holding company
X Corporation tax percentage
= Tax on gross dividends
- Double tax relief for WHT
- Double tax relief for ULT
= Tax due by the holding company

Question 13

With the tax credit method if the double tax relief > the tax on gross dividends

Answer 13

A negative or tax refund cannot be created