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

Orlo Inc has a foreign subsidiary that earned profit before tax of 1,000 (local currency). Local corporate tax is 30%. The subsidiary pays out its entire post-tax profit as a dividend, subject to 5% withholding tax. The parent's home country taxes foreign dividends at 35% on the gross profit underlying the dividend (full underlying tax credit given, plus credit for withholding tax). What is the total additional home country tax payable by the parent?

Additional home tax is 15. The dividend is 700 after 300 local tax, and 35 withholding tax is deducted. Home tax on the grossed-up profit of 1,000 at 35% is 350, less credits of 300 underlying and 35 withholding, leaving 15.

  1. A50.0
  2. B15.0Correct
  3. C0.0
  4. D32.5

Explanation

Profit before tax 1,000, local tax 300, dividend 700. Withholding at 5% = 35. Home tax is 35% of grossed-up profit 1,000 = 350. Credits are underlying tax 300 plus withholding 35 = 335. Additional home tax = 350 - 335 = 15. Option A ignores withholding credit (350 - 300 = 50).

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