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Dear John sir,
doubt1)
I have a minor doubt in the following line, if you could help…“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.”
sir I do realise that additional tax is payable on overseas subsidiary’s operating profits after interest, in case where the tax charge in the foreign country is lower than the charge in the parent’s home country.
But what i am confused about is the latter part of the sentence regarding “full credit…”
Thank you for being so patient with my doubts, sir.
doubt 2) sir why is a dividend withholding tax charged? Is it that the government wants to punish(sorta like discourage the act) that company which is established in its country, but remitting most of its profits away as dividends, to the foreign parent co.?
1. It is the standard was of expressing it in double taxation treaties. If the home country has a tax rate higher than in the foreign country, then the tax paid in the foreign country is taken into account and only the extra is payable in the home country.
If the tax rate in the home country is lower than that in the foreign country, then there is no extra tax payable in the home country (but there is no refund of tax). It is purely designed to ensure that the same profits are not tax twice.
2. Withholding tax is not really there to punish. In most countries, the people receiving dividends have to pay tax on the dividends they receive. To make sure that the authorities actually get the tax they make companies subtract it and only pay the dividend after tax (and pay the tax to the state). Otherwise individuals in the same country might avoid the tax by not entering it on their tax returns, and foreigners might end up not paying any tax on it because the do not have to send tax returns to a foreign country.
The same applies to payments to foreigners for work done. They did the work in the foreign country and so should pay tax on their earnings from that country. So the company has to deduct tax from the amount they pay the people, and pay the tax over to the state.
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