Income from investments in associates - taxation question

CFA Level II FRA
#1

Hey guys,

My question concerns the first vignette of the Practice Problems at the end of Reading 20.

Question 6 asks us to exclude the effects of investments in associates and recalculate net profit margin. The solution only subtracts that income from the firm’s net income. I’m wondering if there shouldn’t be a tax effect as well? Income from investments in associates should be part of non-operating income, along with dividends and interest. Neither in the Schweser notes, nor in the CFA curriculum could I find any info in this regard, no detailed income statement was ever given.

Is income from investments in associates excluded from taxation to avoid double taxation? So it’s part of non-operating income but would not be considered when determining the tax burden?

My study buddy also hit a brick wall here. Any insight would be appreciated.

#2

Suppose that you (personally) own 20% of AAPL. Do you have to pay income taxes on 20% of AAPL’s net income?

Of course not. They don’t send you 20% of their net income, so you aren’t taxed on it.

#3

That’s what I thought, but wasn’t sure.

Thanks!

#4

My pleasure.