Does anyone know what: "Coupon payments on Eurobonds are made gross of tax; those on traditional loan capital are made net of tax" actually mean?? i.e. gross and net of what? To me gross means before and net means after, but is that saying Eurobond coupons are made before tax is deducted, if so who pays tax on? Also, using this logic are loan capital interest payments made after tax is deducted? That doesn't seem to tie in with the income statements which deduct interest before tax is calculated?? I'm confused Thanks
Where does it say this in the notes/solution? Without the context, i'm not sure either, which is worrying with the exam in exactly 2 weeks. Could it be something to do with the fact that eurobonds can be issued without coming under the tax jurisdiction of any country?
Its not in the notes but it is in the smart revise bank of questions, which I presume covers the core reading, so I guess its worth knowing... but don't panic, hopefully someone will be able to enlighten us....???
There are 2 different tax-related questions here I think: 1. How does the payment of debt interest (ie the coupon) affect the company's income statement and the amount of tax it pays? 2. How are interest payments (coupons) taxed in the hands of an individual investor? The more important for CT2 is Question 1. As you say, interest payments are deducted from profit in the income statement before tax is calculated (and so reduce the company's taxable profits). This is true of all the forms of long-term debt in CT2, ie both Eurobonds and traditional loan capital. The difference between the types of capital arises around Question 2 Eurobond coupons are payable gross of tax - it is up to the individual to include this gross income in their returns to the tax authorities. However, most forms of traditional loan capital have their interest payments to individual investors paid net of tax (at 20%). That is to say, the company making the interest payment automatically pays 20% to HMRC and just pays the net amount to individuals. This is similar to the treatment of bank/building society interest in the UK (which is also usually paid net of tax at 20%). The details of this aren't needed for CT2. Hope this helps clear up any confusion Lynn
