The various mechanisms used by the MNE to transfer money from a subsidiary to the parent often are subject to different tax treatments. Which of the following statements is correct?
A) Dividends sent to the parent are more likely to be allowed than interest payments on intracompany debt, although taxes are often owed in the U.S. from dividend payments while no taxes will be due on the interest.
B) Various types of fees, such as license fees, royalties, and management fees, are usually fully deductible in the host country, fully taxed in the home country, and are seldom subjected to a withholding tax.
C) If an otherwise low-tax-rate country charges a withholding tax on repatriated earnings, the total tax burden from using this channel could exceed the taxes due on the transfer of an equivalent pre-tax amount via another transfer mechanism such as management fees.
D) All of the statements above are correct.
E) Only statements b and c are correct.

Question

Quizplus · Accepted Answer

Explanation: Statement A is incorrect because dividends are typically subject to tax both in the host country and potentially in the parent's country, while interest payments on intracompany debt can also be subject to taxes, including withholding taxes, contrary to the assertion that no taxes will be due on the interest. Statement B is partially correct but oversimplified as fees like license fees, royalties, and management fees can be subject to withholding taxes and are not always fully deductible or fully taxed as stated. Statement C correctly highlights the potential for a higher total tax burden due to withholding taxes on repatriated earnings, making it a valid consideration for multinational enterprises (MNEs) in their tax planning strategies.

The Various Mechanisms Used by the MNE to Transfer Money