ACCA Strategic Professional · Advanced Financial Management · Management of international trade and finance
A US parent lends USD 2,000,000 to its UK subsidiary for one year at 6% interest. The UK subsidiary pays UK corporation tax at 25% and the interest is fully tax deductible there. Ignoring all other taxes and withholding tax, what is the after-tax annual cost of the loan interest to the subsidiary?
The after-tax cost is USD 90,000. Annual interest of USD 120,000 (6% of USD 2m) is deductible at 25%, saving USD 30,000 of tax, so the net cost to the subsidiary is USD 90,000.
- AUSD 90,000Correct
- BUSD 120,000
- CUSD 30,000
- DUSD 150,000
Explanation
Interest is 2,000,000 x 6% = 120,000. Tax relief at 25% is 30,000, so the net cost is 90,000. Choosing 120,000 ignores the tax shield, and 30,000 reports only the tax saving.
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