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1) forecast of dividend capacity – why is 4500 ( 10%*45mllion ) deducted ? why are we paying additional tax on Bowerscots cos profit when it is not remitted?
2) why is tax not paid on dividend remitted ? for 20520 .
3) when calculating % required why is 34.387 divided by 36 million , isn’t it like dividend payout is 60% of 36 million and that should be the base . pls help me get the logic
4) what is the concept of withholding tax.
1) It is stated in the question (and it is a normal tax rule as in Paper TX) that Arthuro pays tax on profits declared by Bowerscots. The question also says that there is a bilateral tax treaty (as is always the case in exam questions) and so although Athuro’s tax rate is 30% they get credit for the 20% that Bowerscots has paid and therefor only has to pay the extra 10%.
2) The dividends are paid out of profits that have already been taxed and so they are not taxed again.
3) The total available for distribution as dividend is 36 million. At the moment they are only distributing 60% as dividend, but the question asks what % needs to be distributed in order for Arthuro to maintain its dividend. Given that Arthur’s needs to receive a dividend of 34.387 million, they need Bowerscots to distribute 34.387/36 = 95.5% of their earnings.
4) The question says that withholding tax of 5% is deducted from any dividends paid by Bowerscots. This is standard practice in most countries – when the company pays pays dividends then only 95% goes to recipient and 5% goes to the state. If the recipient lives in the same county as Bowerscot then they can subtract that tax withheld from their total tax liability, but here the recipient is Arthuro who is in a different country and the question says that they get no credit for the tax withheld (so they cannot subtract it from their overall tax liability).
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