- June 8, 2016 at 8:29 am #320718malcolmtuckerMember
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Limni Co says that $15 million in dividends was received from overseas subsidiaries on which 20% tax was already paid. 26% is the rate in Limni’s jurisdiction with credit given for tax already paid.
Wouldn’t this mean that $15 million is 80% of the amount on which the tax was levied, so the dividends actually paid was $15/08 million = $18.75 million? 26% of this amount would be $4.875 m. The tax already paid on it was $18.75 m – $15 m = $3.75 m. Thus, it seems to me that the tax still due in Limni’s jurisdiction would be $4.875 m – $3.75 m = $1.125 m. Or to put it simply, the tax still due from the $15 million is 0.06/0.8 = 0.075 or 7.5%.
If the tax in Limni’s jurisdiction is charged on the amount actually received i.e. $15 m, then the tax due would be 26% of $15 m = $3.9 million and the tax already paid would still be $15 m x 0.2/0.8 = $3.75 million, so the tax still due would be $3.9 m – $3.75 m = $0.15 m i.e. 26% – 0.2/0/8 = 1%.
I don’t understand why in the examiner’s answer the additional tax is the difference in tax rates applied to the after-tax amount from the subsidiary i.e. 6% of $15 m, which is $0.9 m.June 8, 2016 at 9:26 am #320749John MoffatKeymaster
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I will answer you, but in future you must ask in the Ask the Tutor Forum if you want me to answer – this forum is for students to help each other.
What you have written is very valid and would certainly have got the marks (albeit there will only have been 1 mark for this figure).
(There is rarely just one right answer in P4 – so much depends on assumptions – but the markers for P4 are very good.)
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