Bringing the Business in Canada - Essay Example

?Executive Summary Definitely-Maybe PLC, a public limited company that produces chocolates and Ultra-educators Software Limited, a software services company that designs educational software are to expand their businesses in Canada through exportation and through the creation of a wholly owned subsidiary, respectively. This report will detail the new jurisdiction, legal, sale, technical and tax aspects of doing business in Canada with the mother companies based in UK. It will show the advantages of using agreements and treaties existing between the two countries. It would also say why the formation of a wholly-owned subsidiary is better to a branch and give the specifics why and what is needed. All other important legal and labor details pertaining to the creation of the business will be included in this report. Background Alan Brandon, who has a stake in several UK companies plan to expand two of his companies by opening either a branch or a subsidiary in Canada. These two companies are doing well in the past three years and he believes that it be profitable to start expanding abroad. The two companies are Definitely-Maybe PLC, a public limited company that produces chocolates and Ultra-educators Software Limited, a Software services company that designs educational Software. The Board of Directors has given their go signal to expand given the report of Mr. Brandon’s team that the business is feasible in Canada and is likely to succeed. This report is made, at Mr. Alan Brandon’s behest, to show to the Board of Directors what is in store for them when they bring the business in Canada. Objectives It is the objective of this paper to show to the mother companies of both UK-based Definitely-Maybe and Ultra-Educators what entails the expansion of their businesses from UK to Canada in terms of new jurisdiction, legal, sale, technical and tax aspects. This report is basically presented from the legal perspective to ensure the management of possible legal risks. Failure to do so could result into substantial impact on the profitability or commercial transactions that could be detrimental to the life of the company. Scope This report will be enumerating the possible risks Definitely-Maybe may be exposed to if it embarks on the exportation of chocolates to Canada. It will also present the options open to Ultra-Educators in terms of the form of corporate entity that is best suited to it in Canada, including the details and requirements in implementing it. This report will also touch on the treaties and agreements that could be applied to the business and how it may benefit the company as well as the other pertinent labor and immigration issues that the new companies are likely to come across with. Results Importing Chocolates in Canada It is considered to be a regulated activity if commercial goods are imported into Canada. The government agency in charge of such activity is the Canada Border Services Agency. It is the entity that enforces the regulations for import. Before a company can begin importing products to Canada, an import/export number must first be obtained from the Canada Revenue Agency (CRA) and added to the company’s regular business number. Second, the products to be imported must be identified clearly and explicitly. In what country the products are from and in what country they are manufactured must also be determined. The company must see to it that the products are not prohibited in being imported to Canada. Examples of such products include products manufactured by prisoners, reprints of Canadian works with copyright protection, certain birds, counterfeit currencies, all kinds of second-hand aircrafts, with no exceptions, all kinds of second-hand automobiles, except those from the US, all materials regarded as child pornography, hate propaganda, rebellious, treasonable, or obscene, etc. Next, the company should see whether or not the products to be imported are subject to other requirements or restrictions. Once the company has guaranteed that the products can be legally imported to Canada, it must then determine the ten-digit tariff classification number for every item to be imported by calling the Border Information Service or by consulting Customs Tariff. Corporate Entity for Ultra-Educators There are various means at hand, each with its own pros and cons, for running a business in Canada. In choosing the most suitable one, liability issues, tax issues, legal issues, and other key factors must be considered by the foreign entity planning on carrying on business in this country. One of the options of a foreign incorporated enterprise is to set up a branch, due to a number of unique tax advantages associated with this type of business structure. Before a foreign entity can establish a branch, however, it must acquire a license, or register in the state or town where the branch will be carrying on business. A subsidiary, on the other hand, is an entity that a separate entity controls. The controlling entity is referred to as the parent company, and the entity being controlled is referred to as a limited liability company, a corporation, or a company. The parent company does not necessarily mean that it is a more powerful or larger entity; in fact, the parent company may be smaller or larger than its subsidiaries, if there is more than one. It does not also have to be that the parent company and the subsidiary run the same business or run in the same location. There is also the possibility that they could be competitors in the market. The most usual way of controlling a subsidiary is via the parent company’s ownership of shares in the subsidiary. These shares provide the parent company the required votes for determining the makeup of the subsidiary board, and thus, exercising jurisdiction. This results in the common assumption that fifty percent plus one is adequate for creating a subsidiary. There are several factors to be paid when choosing how a foreign entity will continue business in Canada, and specifically, under which type of business structure. On the whole, as regards foreign tax purposes, a Canadian subsidiary may not be merged with other undertakings in the foreign authority. Thus, if an initial phase of losses is projected, establishing a business under a branch office structure may be more advantageous so far as it could allow losses in Canada to be counterbalanced against income n the authority of the headquarters of the foreign entities. One must keep in mind that using a branch office involves particular licensing necessities subjected to local settlement. Since making use of branch offices subjects the foreign entity to local and federal laws, it may be a helpful approach to first take into consideration establishing a wholly owned subsidiary in the jurisdiction of the headquarters of the foreign entities. This said subsidiary could then continue business in Canada via a branch office. Then again, depending on the laws enforced in the jurisdiction of the headquarters of the foreign entities, the foreign parent company may be able to be successful in avoiding direct liability for operations of the Canadian business, with the outcome being that any losses incurred by the Canadian branch office may be consolidated in the foreign entity’s financial statement for tax purposes. Procedures in Forming a Wholly-Owned Subsidiary The first step is planning the corporate structure, that is, what company the subsidiary will be and what will be the parent company. The second step is discussing the plan with clients and lenders. This involves finalizing deals with banks to secure the assets of the company, and settling contracts with major client suppliers. The third step is forming the subsidiary. This involves obtaining a new tax identification number, securing the required licenses, selecting the members of the board, and filing with the state drafts of articles of incorporation. The fourth step is transferring the business. This implies that the parent company transfers the business to the subsidiary, and at the same time, it also receives all of the stock of the subsidiary. Involved also are inventories and manufacturing of equipment, and would usually involve accounts payable and accounts receivable. The parent company must also assign the registered patents and trademarks used in the business to the subsidiary, and the subsidiary registers these with the trademark and patent office in Canada. The subsidiary will also grant the bank of the parent company a security interest in its assets that have been newly transferred. Finally, the fifth step is establishing the books. The subsidiary sets up a new system of accounting capable of producing its own separate balance sheets, financial statements, etc. Double Tax Avoidance Like numerous other nations, the UK levies taxes on companies that reside in the UK on the total of their global revenue. If that revenue has a source in another nation, say, Canada, it may also have to pay taxes under the Canadian laws. This unavoidably results in juridical international double taxation. The types of company revenue most normally involved are royalty income, interest, profits of overseas branches, and dividends, particularly from overseas subsidiaries (for the purposes of this paper, “revenue” is used as a general term that covers income, gains, and profits). On the whole, the function of double taxation relief is reducing or removing the double taxation of revenue which would otherwise result in partiality in the tax treatment of investing companies and a distortion in the global distribution of savings and investment, both inward and outward. Thus, double taxation relief systems are as much a structural attribute of how the world works and how it is taxed, as the source and principles of residence of taxation themselves. The following are impacted by double taxation relief systems: administrative and compliance costs; distortion in the global allotment of investment or savings; the supposed impartiality of tax systems; and the distribution of tax income between nations. Bilateral Investment Treaty Since the late part of the 1950s, bilateral investment treaties have been discussed and settled. While comprehensive descriptions would contradict the diversity of the said treaties, some general characterizations have surfaced. The standard modern bilateral investment treaty includes stipulations intended for offering “recourse to dispute” settlement (investor-to-state and state-to-state); protection against nationalization or expropriation; relative treatment standards (e.g. Most-Favored Nation or National treatment); and particular absolute treatment standards (e.g. equitable and fair treatment). Numerous bilateral investment treaties also include stipulations that permit the transfer of monies and protection from civil disruption and war (UNCTAD, 1998). A few bilateral investment treaties also include stipulations on the transfer of primary employees, and forbidding particular forms of performance prerequisites (UNCTAD, n.d.). In general, the only time that treaty stipulations will be applicable to investments is when have been set up in the host state. Some treaties, nevertheless, specifically those advocated by Canada, the United States, and Japan, may hold out protections to the pre-establishment period, that is, before the investment is set up in the territory of the host state (UNCTAD, 1999). As regards the economy sectors that are involved by the substantive regulations, it is usual for treaties to involve all sectors, except those which are explicitly excluded from the treaty, or not liable from the scope of some of its stipulations. Conclusion It is the finding of this report that it is indeed promising to expand the subject businesses in Canada. Doing so however does not come without costs and sacrifices. Risks will always be a part of any business endeavor and the same applies in this case. The legal aspects should well be taken cared of to prevent future problems. It is also important to gain leverage by using existing treaties and agreements as mentioned above to cut down on costs and at the same time be protected while doing so. All other aspects, as indicated in this report should well be covered to ensure success and prevent problems. All things said, the companies involved are now ready to start preparations for the creation of the new endeavors in Canada. References UNCTAD, (1998). Bilateral Investment Treaties in the Mid-1990s, (United Nations, New York and Geneva 1998) pp. 73-80. UNCTAD, (n.d.). BITs in the Mid-1990s, pp. 81–3; Provisions covering performance requirements are found in some U.S., Canadian and Japanese treaties. UNCTAD, (1999). Admission and Establishment, 1999, pp. 26–8; This issue is discussed more fully in the section on development linkages. Read More