Hi Colin, I was going through the flashcards for chapter 3 and had trouble understanding the 8th flash card in particular the following statements: How the problem manifests itself 1. Subsidiaries in high-tax countries are heavily leveraged, meaning that the profits after interest are very low 2. Intra-group transfer pricing rates are set, which are inconsistent with market rates, leaving the profits in high-tax countries significantly lower 3. Hybrid instruments are used, that lead to a tax deduction in one country and a tax liability in another to transfer taxable profits. Thanks in advance for your help. Kind Regards ishita
Hi, Can you elaborate on what aspect you are having trouble with? Is it one of the three bullets, or more than one?
Hi Colin, It is all three bullet points that I am not clear about, for eg, point 1 what do we mean by the fact "Subsidiaries in high-tax countries are heavily leveraged" and how does that impact profitability. Similarly, I cant seem to be following pint 2 and three either. Hope I was some help in clearly stating my questions. Thanks ans kind regards ishita
High leverage means that the subsidiary has lots of debt. This means that the interest charge chews up the profits leaving no taxable profits. Likewise point two means that intra-group transfer costs are made such that the subsidiary has no taxable profits remaining after the charges, and so pays no tax. The third point is a bit trickier. It suggests that special debt or equity instruments exist that can lead to a tax deduction in one country where the subsidiary is based (the country you aim to pay no tax in) and a tax liability in another (the country you aim to pay your tax in - Grand Cayman??) such that the subsidiary pays no tax.
