Page 70 - AFM Integrated Workbook STUDENT S18-J19

Chapter 3

(W1) Tax

Year 1 taxable loss of 127.0 million Vp is carried forward.

76.1 million Vp is offset in year 2, leaving (127.0m – 76.1m =) 50.9
million Vp to offset in year 3.

So taxable profit in year 3 becomes (199.3m – 50.9m =) 148.4 million
Vp, and tax at 15% is therefore 22.3 million Vp.

(W2) Exchange rate

Spot rate is 20 Vp to $1. Using purchasing power parity theory, with
inflation rates of 3% in Vodland and 6% in the US respectively, this rate
will change by a factor of (1.03 / 1.06) each year.

(W3) Royalty

The royalty is 30 million Vp each year, so to the parent company this will
give a $ income of (30m Vp / exchange rate) each year.

(W4) Extra US tax

Tax is 25% in the US and 15% in Vodland, so 10% extra is payable.

Taxable profit in year 3 is 148.4 million Vp (W1) so the US tax payable in
year 3 is 10% × (148.4m / 18.35) = $0.81 million.

Illustrations and further practice

Now try TYU 5 and TYU 6 in Chapter 3

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