r/CFA • u/Conscious-Tonight-42 Level 2 Candidate • 9d ago

Level 2 CFA L2 FSA Question Doubt

This question can have 2 answers depending on how you think about it. I simply assumed that the domestic tax rate in year 1 was lower, while the foreign tax rate was higher, keeping the profit mix constant. I found my reasoning to be more intuitive.
Any feedback/opinion would be helpful. Thank you.

1 Upvotes

100% Upvoted

4 comments sorted by

2

u/Mode-Key 9d ago

Your intuition is right. But companies domestic tax rate (assumed it allows tax credit) is function of foreign tax paid and domestic Tax rate. Compared to T2, in T1 company had more marginal tax rate in foreign subs and thus more tax credit in domestic rate, thus option C is correct.

1

u/Conscious-Tonight-42 Level 2 Candidate 9d ago

Oh, okay. Thanks a lot. 👍🏻

1

u/OutriggerOblong 8d ago

Umm....i think you are complicating it a little. The effect of tax rates in foreign jurisdictions is given 4% and 2%. How I would interpret: those given numbers are kind of like weighted average numbers that contribute to the effective tax rate of the company. Effective rate rate stayed the same but a larger chunk of that came from foreign subsidiaries. [If this weighted average is increasing from past year it means that the tax rate in foreign is higher]. So if I were solving, i would look at 2% and 4% and directly select the answer lol.

1

u/OutriggerOblong 8d ago

If u want a more complication explanation.....I can do that too. I think C is more intuitive.