CIMA F1 Syllabus C. Fundamentals Of Business Taxation - Double Tax - Notes ^{5 / 7}

This is where a foreign dividend is taxed..

• In the foreign subs country

• and then again as income in the receiving country

3 methods are available to give relief for this:

1. Exemption Method - the company is exempt from paying tax in the receiving country

2. Tax credit method

   Tax paid in the original country is deducted from the tax payable in the receiving country

3. Deduction Method

   Only the income net of withholding and underlying tax is taxed in the receiving country

Example

A foreign sub pays a 54,000 dividend (after deducting 10% withholding tax). They made a PAT of 450,000 after tax paid of 90,000.

In the receiving country, Corporate tax is 40% and the tax credit method is used

How much tax is payable in the receiving country?

Answer

Gross dividend = 54,000 / 90 x 100 = 60,000

Underlying tax = 60,000 x 90000 / 450000 = 12,000

Tax payable in receiving country = Gross dividend of 60,000 + 12,000 = 72,000

Tax = 72,000 x 40% = 28,800
Less Double tax relief (12,000 + 6,000) = (18,000)
Tax to be paid = 10,800

Double Taxation Treaties

Here 2 countries agree together which country will tax income and what method of relief is available