1.International Pulp, a Swiss-based paper company, has annual pretax earnings (in Swiss francs) of SF 600. The corporate tax rate on retained earnings is 55%, and the corporate tax rate that applies to earnings paid out as dividends is 30%. Furthermore, International Pulp pays out 30% of its earnings as dividends, and the individual tax rate that applies to dividends is 40%.

What is the effective tax rate on corporate earnings paid out as dividends?

A)   48%.

B)   55%.

C)   58%.

D)   70%.

2.David Drakar and Leslie O’Rourke both own 100 shares of stock in a German corporation that makes

1.International Pulp, a Swiss-based paper company, has annual pretax earnings (in Swiss francs) of SF 600. The corporate tax rate on retained earnings is 55%, and the corporate tax rate that applies to earnings paid out as dividends is 30%. Furthermore, International Pulp pays out 30% of its earnings as dividends, and the individual tax rate that applies to dividends is 40%.

What is the effective tax rate on corporate earnings paid out as dividends?

A)   48%.

B)   55%.

C)   58%.

D)   70%.

Click for Answer and Explanation C)

This is an example of a split-rate corporate tax system. The calculation of the effective tax rate on a Swiss franc of corporate income distributed as dividends is based on the corporate tax rate for distributed income.

The effective tax rate on income distributed as dividends = 30% + [(1 – 30%) × 40%] = 58%.

2.David Drakar and Leslie O’Rourke both own 100 shares of stock in a German corporation that makes