What is the dividend treatment for overpayment of income?
The Affiliate Tax Rules specify further "penalties" to be meted out to enterprises that refuse to comply with the rules. Following the tax authority's adjustments to an FIE's transfer prices, the FIE must make corresponding adjustments to its books to reflect the amount of adjusted taxable income. If the FIE fails to do so, income amounts paid by the FIE to a foreign affiliate in excess of the arm's-length price may be deemed to be distributed dividends. The dividends are subject to withholding tax and no exemptions are permitted. If the overpayment of income was originally paid to the foreign affiliate in the form of interest or royalties, the withholding tax already withheld and paid may not be adjusted.