Taxsave Inc is tax resident in Country A $($effective corporation tax rate $30\%)$ but

wishes to set up a branch in Country B $($where the effective corporation tax rate

is $20\%).$ There is no double tax treaty between Country A and Country B so that

Taxsave Inc will have to rely on the domestic measures giving double tax relief

unilaterally to reduce its exposure to double taxation. These domestic provisions

are not very generous as it only permits the deduction method. Country A does

have a double tax treaty with Country C$.$ Under this treaty, between Countries A

and C$,$ Country A agrees that it will use the credit method to give double tax relief

for tax suffered in Country C and will also give credit for corporation taxes

$($wherever paid$)$ underlying dividends.

To improve its global tax position, Taxsave Inc decides to form a subsidiary,

Conduit Ltd$,$ which is tax resident in Country C$.$ The branch in Country B is set

up as a branch of Conduit Ltd$,$ rather than a branch of Taxsave Inc. The treaty

between Country B and Country C provides that Country C will exempt from tax

any branch profits received from Country B$,$ and Country B agrees that it will not

charge any withholding tax on remittances of branch profits from Country B to

Country C$.$

Page $6$ of $7$

REQUIRED

Compute the total tax liabilities of Taxsave Inc:

$($i$)$ Without Conduit Ltd;

$($ii$)$ With Conduit Ltd; and

$($iii$)$ By setting up a subsidiary company in Country C$,$ has Taxsave Inc benefitted

from the double tax provisions of the treaties between Country B and Country

C$?$

If yes, calculate the total reduction in total tax liabilities.

$[24$ marks$]$

Country B

Corporation tax $20\%$

Branch profits $$100$K

Tax $ $20$k

Branch profits

$$80$k net

Double tax

treaty

Exemption

Method

adopted

Country C

Conduit Ltd

Income $=$ branch profit

$$100$k gross,

$$80$k net of Country B tax

Exempt from Country C

ax

Dividend $$76$

net

Double tax treaty

Withholding tax on

dividends $=5\%$

Credit method

adopted

Country A

Corporation tax $30\%$

Taxsave Inc

Dividend from Conduit Ltd

Gross of withholding tax $$80$k

Gross of underlying tax $$100$