International Tax Flashcards
Explain WITHHOLDING TAX?
Some countries will deduct tax at source on payment of items such as interest, royalties, rent, dividends and capital gains. The NET INCOME (gross payment less tax) is then received by the beneficiary of the foreign country.
When are dividends paid?
Dividends are paid out of post tax profits.
Explain UNDERLYING TAX?
If a company receives a dividend from an overseas subsidiary, the dividend will effectively have been taxed once in the overseas country as part of normal tax on profits and then again in the country of receipt as income on dividends.
Tax on profits / Profit after tax * Gross Dividend
Explain the calculation if double tax treaty exists using the credit method.
Net dividend received
ADD back WHT
ADD back UT
= Gross Dividend
calculate Total Foreign Tax (Gross Div - Net Div)
Tax at %
LESS: DTR (double tax relief) (lower of foreign and UK Tax)
TAX PAID IN COUNTRY OF RESIDENCE
Can you explain TRANSFER PRICING?
This applies to GROUP situations when either goods are sold between companies at a favourable price or loans are made on favourable terms. This results in transactions not taking place at “arms length” and profits of companies within the group are distorted. These transactions may arise as an attempt to avoid tax, as the group may be attempting to move profits to another country at a lower tax rate.
Define the meaning of OVERSEAS SUBSIDIARY?
An overseas subsidiary is an enterprise RESIDENT for tax purposes in a foreign country whose share capital is owned by an entity resident in another country.
Explain the meaning of WITHHOLDING and UNDERLYING tax?
WITHHOLDING TAX is a tax deducted at source from a payment before it is made to the recipient.
UNDERLYING TAX is the tax on profits out of which a dividend is paid.
What 3 main ways in which relief for double taxation will be given?
EXEMPTION - The countries agree on what certain types of income are exempt or partially exempt.
TAX CREDIT - The tax paid in 1 country may be deducted as a credit from the tax due in the other country - relief is normally restricted to the lower of the 2 tax charges.
DEDUCTION - Tax relief is gained by deducting the foreign tax from the foreign income so that only the “net” amount will be subject to tax in the country of residence.
