• We are pleased to announce that the winner of our Feedback Prize Draw for the Winter 2024-25 session and winning £150 of gift vouchers is Zhao Liang Tay. Congratulations to Zhao Liang. If you fancy winning £150 worth of gift vouchers (from a major UK store) for the Summer 2025 exam sitting for just a few minutes of your time throughout the session, please see our website at https://www.acted.co.uk/further-info.html?pat=feedback#feedback-prize for more information on how you can make sure your name is included in the draw at the end of the session.
  • Please be advised that the SP1, SP5 and SP7 X1 deadline is the 14th July and not the 17th June as first stated. Please accept out apologies for any confusion caused.

Chapter 3 - Flashcards

B

BhatiaI

Member
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.
 
Thank you Colin, that was a lot of help.

Kind Regards
ishita
 
You must log in or register to reply here.
Back
Top