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Diverted Profits and British Tax Levies

GMAT-EXKYFH

Social media giant Hasgurl employs 1350 people in its British headquarters. The advertising profits generated in Britain do not quite reach ten percent of Hasgurl's global profits, so the company does not have to disclose its precise British advertising profits. Because Hasgurl's international headquarters are based in Ireland rather than Britain, the company pays a reduced tax rate on its British profits, since sales are routed through its Irish base of operations. However, the British government plans to adjust the tax plan so that companies like Hasgurl pay more in taxes due to its "diverted profits" tax rate. The government will not be changing the corporate tax rate itself, however, which will remain at twenty percent.

Which of the following, if true, explains how the British government will be able to force companies like Hasgurl to report its sales directly through Britain?

A

The "diverted profits" tax rate will be higher than the corporate rate; therefore, companies will be more likely to sell directly through British headquarters.

B

The government will force companies to declare their British headquarters as their international headquarters; therefore, sales will be made directly through Britain rather than diverted to countries such as Ireland.

C

While the "diverted profits" tax rate will be the same as the corporate tax rate, a greater proportion of profits is being diverted, which means a greater quantity of profits will be taxed.

D

The diversion of profits becomes illegal under the new tax law, forcing companies to sell directly through their British headquarters rather than through countries such as Ireland.

E

The "diverted profits" tax rate measures profits in such a way that British profits will be tallied as reaching ten percent or more than the company's global profits, which means the company will have to disclose its actual British profits.