CIMA F1 Syllabus C. Fundamentals Of Business Taxation - Dividends from abroad - Notes ^{4 / 7}

These cause 2 types of tax issues:

1. Witholding tax

2. Underlying tax

Withholding tax

This is where the foreign country keeps (withholds) some tax on the dividend leaving

• eg. Foreign sub pays a 100 dividend AFTER deducting 20% withholding tax

  The problem is that the 100 is deemed to be after the tax - so the 100 received by the company is only 80% of the true dividend

  So the true dividend is deemed to be 100 / 80 x 100 = 125

  So the withholding tax is 125 - 100 = 25

  It can also be calculated as 100 / 80 x 20 = 25

Underlying Tax

Dividends only get paid after profits have been taxed

Underlying tax is the tax that has been charged on the profits which gave the dividends

This can then be used as a tax relief

• Let's say a company has 80 profits (AFTER TAX). The tax paid was 20. What was the tax rate?

  20 / 80 = 25%

  Another way of writing this is: Tax paid / PAT

  You can calculate the tax rate in the country

• Now we know the tax rate used on the PAT. This is where the dividends come from.

  So lets now suppose the company gives its parent a dividend of 10 from these profits AFTER withholding tax of 10%

  Now we need to work out the gross dividend: 10 / 90 x 100 = 11.11

  So the underlying tax on this is 11.11 x 25% = 0.28

• Putting all this together - you calculate underlying tax like this:

  Gross dividend x tax paid by foreign sub / foreign PAT

Example

Foreign company pays a 100 dividend (net of 20% withholding tax)

That company made 400 PAT, and paid tax of 100

What is the underlying tax on the dividend?

Answer

Gross dividend = 100 / 80 x 100 = 125

Underlying tax = gross dividend x tax paid / PAT = 125 x 100 / 400 = 31.25