Tax considerations influence the dividend policies
Dividend income is taxed differently from Profit and therefore the tax position of the investors can influence their preference.
e.g There is a different tax rate paid on dividends in different countries (somewhere 0% or 5% or 15%)
The parent company can reduce its tax liability by receiving larger amounts of dividends from subsidiaries in countries where undistributed earnings are taxed.
For subsidiaries of UK companies, all foreign profits are liable to UK corporation tax, with a credit for the tax that has already been paid abroad.
The US government does not distinguish between income earned abroad and income earned at home.
The corporate tax rate in the home country is 35% and in the overseas country where a subsidiary is located is 20%.
Both the parent company and the subsidiary have pre-tax profits of $1000.
Taxes to foreign government = 1000 x 20% = 200
Profit after foreign tax = 1,000 – 200 = 800
Home tax = 1000 x 35% = 350
Foreign tax credit = 200
Net tax = 350 – 200 = 150
Total taxes = 200 + 150 = 350.
Notice that they have effectively paid 35% (which is the rate in the home country)