Tax and minimum profit

[Benjamin]

Hi,

Another one on tax and minimum profit.

Ref 1: CMP, Ch7, p.11 (s5.2, first bullet point)
If MP does not bite, corporation tax is paid on "...the I-E equal to that part of the minimum profit not derived from dividends..."

Ref 2: CMP, Ch 7, p.6 (s3.3)
"The adjusted I-E figure is the I-E result plus BLAGAB share of dividend income"

Why is "minimum profit" referred to in the quote in Ref 1 above? If the minimum profit test does not bite, then how is it relevant here? Given Ref 2, is corporation tax not just paid on the regular BLAGAB I-E amount? (i.e. the definition of "adjusted I-E" in Ref 2 is 'BLAGAB I-E plus share of divs' - so if you remove share of divs, are you not just left with BLAGAB I-E? Otherwise, what exactly is the "...that part of the minimum profit..." mentioned in Ref 1)

 

[Benjamin]

Having had a re-read of Ch7, p.4, is the entirety of the situation in which the MPT does NOT bite, as follows:
1. I-E calculated
2. Of this, minimum profit (MP) amount is shareholder profits
2.1 Of the MP amount, the component not arising from divs is taxed at corp rate
3. Non-MP part of I-E is taxed at the policyholder rate

But, CMP Ch 7 p.11, bullet point 2 implies that:
2.2 Of the MP amount, the component that does arise from divs is taxed at the policyholder rate

However, CMP Ch7 p.4, number 2 implies that:
This divs component is not taxed at all

So what happens with the div component of the MP?

 

[Lindsay Smitherman]

It is not taxed (is treated as having already suffered corporate taxation, since paid out of the post-tax profits of the source company).

On page 11, the second bullet point means that the excess of "I-E" over {minimum profit excluding dividends} is taxed at the policyholder rate. A few lines down from there, the Core Reading confirms that "I-E" excludes dividends, and hence dividends are not taxed.

 

[Benjamin]

Ok, so, just to be sure, is this the full range of possible outcomes with regard to minimum profit test:

https://1drv.ms/i/s!AkSw0bCFUumyjC2joVklse-Hqc4R

Concerning dividends, I see that they are included in the calculation of minimum profit and also in the minimum profit test - what's the purpose of this? Seems like it's just adding the same amount to both sides of an equation.

 

[Mark Willder]

Concerning dividends, I see that they are included in the calculation of minimum profit and also in the minimum profit test - what's the purpose of this? Seems like it's just adding the same amount to both sides of an equation.

The Core Reading says:


The minimum profit is effectively the accounting profit arising from BLAGAB (including BLAGAB share of non-taxable dividends), after a deduction for policyholder bonuses and adjustment for current and deferred tax on policyholder I–E items.


If the minimum profit is positive, it is compared with the result of an adjusted BLAGAB I–E computation. The adjusted I–E figure is the I–E result plus BLAGAB share of dividend income.



Yes, we are just adding dividends to both sides (the minimum profit and the adjusted I-E). This means that we are comparing like with like.

Best wishes

Mark

 

[Mark Willder]

Ok, so, just to be sure, is this the full range of possible outcomes with regard to minimum profit test:

https://1drv.ms/i/s!AkSw0bCFUumyjC2joVklse-Hqc4R

Hi Benjamin

I think you are almost there with this. You have all the different possible outcomes. I'd just correct one thing.

You said "BLAGAB trading profits set = MP by reducing E carry diff forwards". Instead you should say set the adjusted I-E equal to the minimum profit. But yes you are right about carrying the XSE forwards.

Best wishes

Mark

 

[Benjamin]

Thanks Mark