Page 27 - FINAL CFA II SLIDES JUNE 2019 DAY 6

LOS 22.f: Calculate and interpret the effective tax rate on a given
currency unit of corporate earnings under double taxation, READING 22: DIVIDENDS AND SHARE REPURCHASES: ANALYSIS
dividend imputation, and split-rate tax systems.

MODULE 22.1: THEORIES OF DIVIDEND POLICY
Under an imputation tax system, taxes are paid at the corporate level but are
attributed to the shareholder, so that all taxes are effectively paid at the
shareholder rate. Shareholders deduct their portion of the taxes paid by the
corporation from their tax return.

• If the shareholder tax bracket < company tax rate, shareholder receive a tax credit (= difference between the two rates)
• If the shareholder’s tax bracket > company’s tax rate, the shareholder pays the difference between the two rates.

EXAMPLE: Effective tax rate under an imputation system: Phil Cornelius and Ian Todd both own 100 shares of stock in a British corporation
that makes £1.00 per share in pretax income. The corporation pays out all of its income as dividends. Cornelius is in the 20% individual tax
bracket, while Todd is in the 40% individual tax bracket. The tax rate applicable to the corporation is 30%. Calculate the effective tax rate on the
dividend for each shareholder.

Under an imputation system,
the effective tax rate on the
dividend is simply the
shareholder’s marginal tax
rate.