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ACCA Strategic Professional · Advanced Financial Management · Dividend policy in multinationals and transfer pricing

Epsilon Co's subsidiary in country X earns taxable profit of 1,000,000 before a dividend. Country X taxes profit at 20% and charges 10% withholding tax on dividends paid abroad. The parent's country taxes foreign dividends at 30% with credit for underlying and withholding tax. The subsidiary pays out all post-tax profit as a dividend. What is the total group tax on this profit, and the net cash received by the parent?

Total tax is 300,000 and net cash to the parent is 700,000. Foreign tax is 200,000 plus 80,000 withholding, and the parent pays 20,000 top-up so that the overall rate equals its 30% rate after credit relief.

  1. ATotal tax 300,000; net cash 700,000Correct
  2. BTotal tax 280,000; net cash 720,000
  3. CTotal tax 300,000; net cash 720,000
  4. DTotal tax 200,000; net cash 800,000

Explanation

Subsidiary tax 200,000, dividend 800,000, withholding 80,000, so tax paid abroad 280,000. Parent tax: grossed-up income is 1,000,000 x 30% = 300,000 with credit up to this amount for the 280,000 foreign tax, so 20,000 extra is payable. Total tax 300,000 and net cash 1,000,000 - 300,000 = 700,000.

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