international investment appraisal

To calculate the tax in the foreign country you can take either approach.

With regard to the tax payable in the home country, it is the excess of the rate in the home country over the rate in the foreign country.

If you have in the first part, subtracted depreciation, calculated the tax, and then added back the depreciation, then you can calculate the extra tax directly.

If you have in the first part taken the other approach (tax on operating income and separately tax saving on capital allowances) then to calculate the extra tax in the home country you need to base it on the final tax payable in the foreign country (i.e. the tax on the operating income less the tax saving on the capital allowances).

Either approach is fine and will end up giving the same final answer.

No 🙁

The tax paid overseas is 20 (on the operating income) less 10 (the tax savings) so net tax of 10.

However this tax was calculated at 20%, and we need the extra 5% tax payable in the home country.

So what you need to do is this:

Take the net tax paid of 10, multiple by 100/20 (to give the total that the tax would have been paid on) and then multiply by 5% (for the extra tax).

So…..10 x 100/20 x 5% = 2.5 is the extra tax payable.