The oil firm that Jacobs controls is headquartered in the island country of Mahjong, located near Sahjong. Because of the foreign location of the oil firm, Simson believes there might be opportunities to reduce taxes.
Simson knows that Sahjong uses the exemption method, whereby it does not impose taxes on income that stems from a foreign country. However, Sahjong will soon hold parliamentary elections, and the opposition party is said to favor the deduction method. Simson plans to investigate how this possible change might affect Jacobs’ tax liability. She compares the tax rates in the two countries in Exhibit 3.
COMPARATIVE INCOME TAX RATES: Sahjong 10%, Mahjong 15,5%
Q. If the opposition party wins the election in Sahjong and its tax proposals are passed into law, the tax rate that Jacobs will face on income stemming from Mahjong will be closest to:
Under deduction method, I would say 15.5% go to Mahjong… could someone pls tell me if you agree? Thanks!