Dec 2010 Question 4 Lamri Co

In part (a) of the above mentioned question, we were asked to calculate Lamri’s Dividend capacity after TE’s proposal is taken into account.

I am happy with all the logic of the figures in my BPP kit apart from two issues.

In the question there were these points that are giving me problems:

If Lamri changes Strymon’s policy, it is expected that Strymon would be asked to remit 75% of its after-tax profits as dividends to Lamri and :

Lamri’s, Magnolia’s and Strymon’s profits are taxed at 28%, 22% and 42% respectively. A withholding tax of 10% is deducted from any dividends remitted from Strymon. and:

The tax authorities where Lamri is based charge tax on profits made by subsidiary companies but give full credit for tax already paid by overseas subsidiaries.

S’s after tax profits after TE’s proposal is taken into consideration is $1.32M then we are supposed to remit 75% of these to Lamri with a withholding tax of 10% so we remit a net amount of 0.89M to Lamri but then my BPP kit after the 0.89M deduct a further 0.1M of withholding tax to arrive at S’s retained profits. Isn’t this double counting? The gross remittances should be 0.99 M and we deduct 0.1M withholding tax to arrive at 0.89M so what’s the logic of further deducting 0.1M when it is already deducted. Please explain.