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“Given the lower tax rate in Owlia, for tax purposes higher retained earnings for Bowerscots Co would be preferable, possibly with funds loaned to Arthuro Co rather than paid as dividends.”
sir i feel the reasoning is wrong here. high retained earnings are preferable in owlia because there is a withholding tax of 5% on any divdend remittances, so profits should get accumulated there instead of being remitted.
When they say that profits should be retained owlia because of low tax regime there, makes no sense as Arthur co anyway has to pay additional tax on operating profits after interest of bowercosts.
The reasoning is not wrong and does make sense (and although the examiner is not perfect, it is very rare for his answers to state anything wrongly!).
The tax on profits is not affected in any way by the level of dividends paid, but as the question and the answer both make perfectly clear it is the withholding tax on the dividends that will be saved if they do not pay dividends but instead retain the earnings.
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