Private Wealth - double taxation

CFA Level III Portfolio Management
#1

The oil firm that Jacobs controls is headquartered in the island country of Mahjong, located near Sahjong. Because of the foreign location of the oil firm, Simson believes there might be opportunities to reduce taxes.

Simson knows that Sahjong uses the exemption method, whereby it does not impose taxes on income that stems from a foreign country. However, Sahjong will soon hold parliamentary elections, and the opposition party is said to favor the deduction method. Simson plans to investigate how this possible change might affect Jacobs’ tax liability. She compares the tax rates in the two countries in Exhibit 3.

EXHIBIT 3

COMPARATIVE INCOME TAX RATES: Sahjong 10%, Mahjong 15,5%

Q. If the opposition party wins the election in Sahjong and its tax proposals are passed into law, the tax rate that Jacobs will face on income stemming from Mahjong will be closest to:

  1. 0.0%.
  2. 15.5%.
  3. 24.0%

Under deduction method, I would say 15.5% go to Mahjong… could someone pls tell me if you agree? Thanks!

#2

How much (i.e., what percentage) tax will Jacobs pay to Mahjong?

How much tax will Jacobs pay to Sahjong?

How much tax will Jacobs pay in toto?

#3

Under deduction method:total tax = 24%.

“individual pays the full tax to the source country and is only allowed to deduct taxes paid to the source country in calculating total world-wide income.” 15.5% allocated to the source jurisdiction/Mahjong. Deduct it from 24%, hence 8,5 is received by the residence jurisdiction/Sahjong?

thank you a lot

#4

15.5% + (1 − 15.5%)(10%) = 23.95%.

#5

Thank you, however the book gives examples for the deduction method as I have written above… full tax goes to source, whatever is elft (from total tax) goes to the residence…

#6

Stop using Kaplan Schweser for L3 and stick to the CFAI material. Trust me on this one…

#7

Yes, you’re right. The Source (Mahjong) gets 15.5% and the Residence country (Sahjong) gets the remaining 8.45% (= 10% x (1 - 0.155)). So, Jacob’s total effective tax rate is 15.5% + 8.45% = 23.95%.

The question was not asking how much was specifically going to Mahjong.