Page 68 - F1 Integrated Workbook STUDENT 2018

Chaptter 3

Exxampple 1

Hommely is a UUK entity and owns 100% of thee shares inn a foreign entity calleed
Farraway.

Durring the yeear Farawaay earned tthe followinng income::
Proofit before ttax $200,000

Incoome tax $(40,000)
– ––––––––
Proofit after taxx $160,000

Farraway payss a dividennd of $80,0000 out of pprofit after tax to Hommely. This
diviidend is suubject to 155% withhollding tax.

Whhat is the ttotal foreiggn tax sufffered on tthe dividend?
Sollution

$
Witthholding taax
$800,000 × 15% 12,000
Undderlying tax
($440,000/$160,000) × $$80,000 20,000
––––––
32,000

This means:
Thee dividend distributedd by Farawway was $880,000.

Thee foreign country dedducted withhholding taax of $12,000 and, the erefore, the
shaareholder wwould only receive $668,000 in ccash.
Thee profits in Faraway wwere taxedd before the $80,000 was distribbuted.
Theerefore, thee underlyinng tax is thhe amount of tax the ddividend has alreadyy
sufffered priorr to distribuution when it was taxeed as a proofit.

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