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Hi. In part (a), for the tax paid on Magnolia’s profits, it is calculated as (28 – 22)% x 5.40m = 0.32. Please may I know the rationale of using “28% – 22%”, instead of “22%”, since Magnolia’s profit will be taxed at 22%, as according to the question?
Thank you.
As per note 3 of the question, Lamri is taxed at 28% on all their profits including profits made by subsidiaries. They get full credit for tax already paid by subsidiaries. Magnolia has already been taxed at 22% and so Lamri only has to Pau the extra 6%.
(This is the normal tax rule in practice when there is a bilateral tax treaty, and I explain it also in my free lectures on foreign investment appraisal.)
Oh I see. That means there’s no tax paid on Strymon’s profit because Strymon has already been taxed at 42%, and Lamri will therefore get full credit for such tax already paid?
Thank you.
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