Split Rate Tax

CFA Level II
#1

Split-rate

A split rate corporate tax system taxes earnings distributed as dividends at a lower rate than earnings that are retained. The effect is to offset the higher tax rate applied to dividends at the individual level.

Is this exactly the same as effective tax rate except the dividend tax rate is lower? Any clarity on this would be great.

Imputation Tax system

Taxes are paid at the corporate level but are attrihbuted to the shareholder, so that all taxes are effectively paid at the shareholder rate. Shareholders deduct their portion of the taxes paid by the corporation from their tax return.

Can anyone explain this is laymans terms?

Thanks

#2

Imputation Tax system -

If you and I each hold 100 shares of XYZ and XYZ earns $1 per share ($100 each for yours and mine), XYZ corp will pay $20 in taxes for you and $10 for me assuming that’s our individual tax rate. On our tax returns, we can deduct these taxes (take tax credit) as already having been paid. XYZ will report that it paid $30 in corporate taxes on $200 of earnings.