Topic 9

Question 4:

The measures that can be adopted to prevent tax revenue losses from multinational companies are as follows;

a) Thin Capitalisation Legislation is were a country prevents interest deduction if the ratio of debt to equity is in excess of a permitted amount. Some countries even limit the amount of debt that a subsidiary may borrow in relation to its equity base. When the interest exceeds the specified limits the interest paid from the excess debt is not tax deductible and can even be regarded as a dividend.
b) Controlled foreign company legislation prevents companies based in tax havens which are controlled by a non resident shareholder from retaining profits earned in that country so as to prevent the taxpayers country from collecting tax revenue from that profit. The legislation requires the taxpayers to include the profits which are attributable to the taxpayer even if the controlled foreign company pays a dividend or not.
c) Transfer pricing is were companies attempt to minimise tax by selectively allocating income and expenses between domestic and foreign entities, whereas transactions between entities are still required to be dealt in an arms length arrangement with transfer pricing this does not occur . Countries that have enacted anti-transfer pricing legislation recalculate the enterprises taxable profit using arms length pricing which is not recognised in the International Accounting Standards Section 27 Consolidated and Separate Financial Statements. Some of the methods used by countries are
• Comparable uncontrolled price method
• Resale price
• Cost plus method

Topic 10

Question 1:

(a) The tax implications for Bill Bates as he is working in Country B he would have withholding tax even though he is only a temporary resident of Country B. For this reason Bill Bates would be allowed to get an exemption or a credit for the tax that he has paid in that country which is covered under Articles 23A and 23B of the OECD Model Treaty. Even though bill is only there to see wether there is a market for Maixsoft’s products. At this stage Maxisoft would have tax liabilities with Country B as it has no establishment or residency in that country.

(b) There is a no correct answer for this question but each company must look at its individual needs and expectations and also the financial implications that either decision would make.

For small companies like Maxisoft the first thing that they should do is compare the advantages and disadvantages of the two options branch or subsidiary;

Subsidiary
Advantages Disadvantages Lower tax rates More onerous account keeping
Limited Liability Withholding tax paid on dividends
Limited Disclosure Losses not available for offset
Better local image Change on ownership occurs on transfer of assets
Greater flexibility in timing of profit repatriation
Access to incentives
Easier to reorganise
Easier to justify charges between subsidiary and parent

Branch
Advantages

Simpler to operate less onerous account keeping
No foreign capital or stamp taxes
Easy to transfer assets as no change of ownership
Losses can immediately offset against the head office profits
No withholding tax on profits when remitted back to head office Disadvantages Often higher tax rates
No Limited Liability
More disclosure to head office
Little flexibility for timing of profit repatriation
Less access for incentives
Not easy to reorganise foreign activities
Lower image and profile than a Subsidiary

Although at first it might seem that opening a subsidiary might be the best course of action for Maxisoft but we first must look at the how Maxisoft are going to operate in Country b and from there we can ascertain the best course of action for them to take.

As Maxisoft are intending to impart their product into Country B and then use an outlet there for them to sell their product. It would be more advantageous for them to open a branch in Country B for the initial stages of operations and when the business is operating at a profit it could be turned into a subsidiary in that way the company could take advantage of both aspects of operating in a foreign country. They could offset the losses from the start up of the foreign enterprise and when the company starts to turn a profit it can convert that operation into a subsidiary to benefit from the numerous advantages that a subsidiary can achieve. Topic 10

Question 3:

There are numerous methods that the manager director can take to reduce the overall worldwide tax rate of the group such as offshore holding Companies, Profit reduction techniques and Treaty shopping.

Benefits of an Offshore Holding Company are;
• Some jurisdictions which include the Netherlands, Switzerland and Luxemburg provide special tax privileges to holding companies such as 5% withholding taxes on dividends which can be beneficial to the parent company.
• Dividends from a foreign subsidiary can be collected in a foreign offshore holding company instead of going to the parent company.
• By utilising a foreign holding company a parent company can assign where and when to use foreign tax credits by placing all foreign subsidiaries under control of one foreign holding company.
• An offshore trading company can buy goods from one company and sell it a foreign subsidiary for a profit thus reducing the tax liability in higher taxing countries.

Profit Reduction Techniques can be used to transfer profits from one subsidiary or branch in a higher taxing country to a much lower taxing jurisdiction such as;
• Tax Treaty planning; Withholding taxes under double tax treaties can be reduced lower or even to nothing.
• Interest payments can be used to lower the tax payments in the required country i.e. If the home country needs to reduce its taxation obligation it can borrow funds and then use the funds to inject to a foreign subsidiary as share capital and vice versa.
• An offshore company can be set up in a jurisdiction that does not tax royalties or intangible assets such as trademarks, copyrights and franchising rights.
• Management fees can be payed by subsidiaries to offshore holding companies that have favourable taxation regimes.
• A property investment company in a suitable location may purchase properties and rent it back to the foreign subsidiaries therefore shifting the profits to a lower taxing jurisdiction. Treaty Shopping is where third country residents use double tax agreements to obtain the advantage of reduced tax rates in these countries and exploit them. One way of this happening is that a resident sets up a holding company in a low taxing country that has a double tax agreement where the product you gain revenue from or is licensed to. The income will flow to the holding company and would benefit from the double tax agreement and whichever section the third party has exploited the profits can then be delivered to the third party whilst leaving a small amount of profit in the holding company, but for this to happen the third parties country would need to have a double tax treaty with whichever country the holding company is based so as to ensure that a favourable tax condition was still established.