Q6.5 taxation

[Actuary@22]

Hi
In Ch6 Taxation Ques 6.5,Wont E be lower in country Y so it would mean a lower E in IE basis,so by this logic wont there be an offsetting impact?And how do we know minimum profit test still bites?
Since as per my understanding in country Y adjusted profits will be lower but them IE would also be higher so do we know if trading profit>I-E?

I am confused.

 

[Em Francis]

It tells us in the solution:
'Higher trading profits means higher ‘minimum profit’, therefore it is more likely that the minimum profits test bites – and so more companies are likely to be XSE.

If you are asking how do we know that the minimum test bites, we don't but it is more likely for a company in country Y than for one in country X if we assume the companies have the same I-E.

 

[Actuary@22]

But I still didnt get why would the companies have the same I-E as I mentioned above?

 

[Em Francis]

It is an assumption ('all else being equal'), we have nothing else to go on.

 

[Lindsay Smitherman]

Just to add, I think you might be confusing carrying forward unrelieved expenses (XSE) and carrying forward losses to offset against future profits. This question is about the latter.

In country Y, the amount of trading loss that can be carried forward is lower than in country X, so country Y is likely to have higher profits.

This isn't the same thing as the XSE that might be carried forward. Your point about E being lower in country Y seems to be based on an assumption that less XSE can be carried forward in country Y than in country X? But carrying forward losses (to offset the minimum profit figure) and carrying forward XSE (to add onto E in the 'I-E' part of the calculation) are different things. We aren't told anything about the XSE rules differing between the two countries (so have to assume that they are the same, and so I-E would be the same too), we are only told about the minimum profit carry forward rules.

Hopefully that has helped to clear up the potential confusion.