Page 30 - Strategic Tax Planning for Global Commerce & Investment

Cross Border Tax Planning Strategies

Application of Withholding Tax
EXAMPLE A EXAMPLE B
Country A Country A
Operating Profit $ 100 Operting Profit $100
Interest Income $ 40
Taxable Income $100 Taxable Income $140
Tax at 30% $ 30 Tax at 30% $ 42
Credit for $ 12
withholding
Total Tax Revenue $ 30 Total Tax Revenue $ 30

Country B Country B
Operating Profit $ 50 Operating Profit $ 50
Interest Expense $ 40
Taxable Income $ 10
Tax at 30% $ 15 Tax at 30% $ 3
Withholding Tax $ 12
Total Tax Revenue $ 15 Total Tax Revenue $ 15

Imposing a withholding tax generally makes a jurisdiction
unattractive from fiscal viewpoint. In particular, effective
denial of tax relief in the jurisdiction of a subsidiary
establishment (whether through thin capitalization,
withholding taxes or any other mechanism) will often result in
the multinational unable to obtain tax relief for some of its
external interest expense in any jurisdiction. To mitigate this
effect, and to make themselves more attractive as investment
destinations, many countries have entered into tax treaties that
very significantly reduce or eliminate the incidence of
withholding taxes on interest.

Effect of Form of Financing on ETR

Looked from the point of view of the group as a whole, the
choice of the form of financing in the subsidiaries (debt vs.
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