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International Taxation
Types of foreign tax
4.1 Withholding tax
Some countries will deduct tax at source on items such as interest, royalties, rent,
dividends and capital gains. The net income (gross payment less tax) is then
received by the beneficiary in the foreign country.
Withholding tax = (Net amount received/(100 – tax rate deducted)) × tax rate
4.2 Underlying tax
When an entity pays out a dividend, it is done so out of post- tax profits.
Therefore, the amount of profit distributed as a dividend will have already suffered tax
on profits.
If an entity receives a dividend from an overseas subsidiary, the dividend will 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.
This is calculated as follows:
Tax on foreign profits
Underlying tax = ––––––––––––––––––– × gross dividend
Profits after tax
You will not be assessed on the calculation of foreign taxation but you should
have a general appreciation what it represents.
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