Because Some Countries Have a Lower Withholding Tax on Interest

question 12

Multiple Choice

Because some countries have a lower withholding tax on interest than they do for dividends, multinational corporations may finance foreign operations with debt rather than equity. What additional reason may an MNC have for using this investment strategy?

• A) Interest is generally a deductible expense, whereas dividends paid are not.
• B) Dividends require a cash outflow but interest does not.
• C) Cash flows from dividends must be discounted using the cost of capital, which is not the case for interest.
• D) All of the above

---

Definitions:

Indebtedness

The condition of owing money or being under financial obligation to others, which could include loans or issued bonds.

Profitability

A measure of how efficiently a company or business generates profit in relation to its revenue.