The International Taxation System - Case Study Example

Taxation Report Lecture: Student Name: Student ID: Date: Residency of a company for tax purposes is considered in determining the taxable value, and the rate is also applicable. The company is considered a non-resident when the head office is registered and operated outside the country (Sandler, 2007), and also its registration as a legal entity is done in the foreign country. For tax purposes, some allowance will not be considered as deductible against the net income of the company in determining the net adjusted taxable profit of the company and tax payable. The income of the foreign company is subject to a higher tax rate above the normal 30% tax rate of resident companies. The company pays tax only on their income derived from the Australian source. Any other income is deemed to have been tax in that country to which they generated that income. The tax expatriate will be considered for tax purposes when their main business in the country is to serve the company and duties assigned (Study Group on Asian Tax Administration and Research, 2006). expatriate are employed in the company registered had office and located to a company in which they are suppose to supervise in another country, he/she is not allowed to transact any business in the country that earns profit other than the main duties of being a director. Otherwise, any profit generated will be subject to a further taxation. Withholding tax is regarded not the final tax, and they are subject to a further taxation but for resident companies, withholding tax is a final tax which suffers only 5% and some expense and deduction are treated as allowable. From the above case, ABC Company is a non-resident because it is registered in Hong Kong, its head office and management controlled in Hong Kong. A company to be resident must which be incorporated in Australia and does business in Australia. It should have its central management and control in Australia or their voting right can be exercised in Australia by the resident shareholders (Monsenego, 2009). Therefore, ABC LTD is not a resident company because the first two conditions of central management and control are not met though shareholders exercise their voting right in Australia. Case laws: Mitchell v. Egyptian Hotels Ltd (1915) lord parker stated’ Where the brain which controls the operations from which the profits, and gains arise is in this country the trade or business is, at any rate partly, carried on in this country (Sandler, 2007). This means that a company doing business in Australia should have its control and management or voting right of shareholders situated in Australia for residence purposes. This therefore, was applied that mere trading in Australia does not mean that the company is a resident. Also the two requirements of central management and control should be considered. Case study: Commissioner of Inland Revenue vs. bartica investment In the above case, the taxpayer had a company incorporated in Hong Kong and had its directors operate at the head office in Hong Kong. The nominee company held share as a beneficiary of a family living in Australia and in which they invested in a hotel company in Australia (editors, 2009). The hotel was owned and incorporated in Australia, and the families were beneficiary. The hotel had to borrow loan from Westpac bank to finance its operation. Westpac bank operates in Australia and has branches and subsidiaries in other countries. The loan agreements were entered into between the bank and the family (Mr. X and the daughter) in Australia. The family money was deposited to Westpac bank in Hong Kong, and two accounts were opened which will act as a loan security to the hotel suggested by Mr. x who was in Australia. The loan was received and repayment made in sequence. The hotel was in need of cash and Westpac was in a position lending out and so the daughter had to approach Citibank. The loan agreement took place in Singapore and Australia and thus the bank agreed to loan the hotel and repayment were made to the bank. In anticipation that more funds would be needed to finance the hotel, Hongkong bank and shanghai Banking Corporation based in Australia would be approach but the fund could not be granted, and the accounts were closed. HELD: The family had an intention of gaining tax benefit and so they had to include a tax payer in their business. This was envisaged by the family placing of off-shore deposits and guarantee as collateral for loan borrowed. Taxpayers assets were given inform of money advance by the family members. According to lord Diplock .gain was made from the use of money asset by the hotel and constituted a carrying of business in Australia. The board came to the conclusion that placing of deposit with the three banks did not constitute carrying of business for taxation purposes. also placing money on deposits and giving of guarantee did not constitute a business activity for tax purposes and thus Mr. x is not a resident in Australia as long as company residency is concerned though some placing and deposits took place in banks situated in Australia (Sandler, 2007). The law states that for a company to be considered resident, it must have been registered in Australia, its control and management operated in Australia with its head office. Also, the shareholders must be resident and able to exercise their voting right and thus the hotel company was registered in Hong Kong but has its operation in Australia and thus qualifies as nonresident company. The hotel will be subject to a tax consequence on non-resident companies, and if benefits and allowable expense accrued, it will be subject to the same consideration of nonresident company’s taxation. This case study was majorly on consideration whether a business took place, and further concerning the nature of company residency in the tax computation and tax consequences’ resident company would always enjoy some trading benefit over the nonresident companies. Some deduction in arriving at the net adjusted taxable profit is treated has allowable in resident companies and non-allowable in non-resident companies. Tax consequences’ of the following: a.) Receipt of $200,000 from the client as a result of cancelling the contract. The tax implication of a receipt from non business income is that, for it to be treated as a trading income, a gain should have arisen from the same.ABC LTD received a sum of $ 200,000 as a result of contract cancellation, and thus this is not subject to taxation because this is not the main source or designated source of income to the company (R. A. Friesen, 2008). Income tax act does not recognize income from contract cancellation and therefore the company should be taxed accordingly if from cancellation, receipt is intended to compensate for loss suffered. Therefore a breach of contract would result in taking the right cause of action by arranging some negotiated settlement inform of compensation A receipt is always recognized as income when profit is realized from the trade and that Compensation received is only for one contract and then contractual agreement continues. Case law: Kelsall v Parsons ([1938] 21 TC 608. An agent acting for many manufacturer received compensation for early termination from one of their agreement Held: the compensation received formed part of taxable profit and should be subject to taxation b.) Insurance claim for damage bill and the loss of income. The compensation for loss of assets is a chargeable gain and an income tax charge take place over capital gain tax .a liability of capital gain tax would not arise if there is a compensation receipt on the damaged assets but specific discharge on compensation and or damages is granted only to an individual who suffered loss in the cause of his duties and not a legal entity. This therefore means that ABC LTD would not be exempted from capital gain tax and will be liable to pay the capital gain tax because compensation receipt is treated as a business income. If ABC LTD would not have recovered the cost of damaged properties from the insurance company, then company will not suffer taxation and thus the expense will be treated as an allowable expense and deducted from the net taxable profit in arriving at adjusted taxable profit because the loss of property and non-payment by the insurance company will not restore the company to its previous state of business. c.) Interest income. Interest income received by a non resident company of $12,500 is a taxable income in which withholding tax is a final tax. Foreign companies are always taxed on the income generated in Australia other than interest income, dividend, royalties and other income which suffers withholding tax at the same rate applicable to resident companies.non resident companies will be granted relief from other incomes which were subject to further taxation under an agreement with the tax authority.ABC ltd will be taxed at the withholding tax rate but they will be allowed to have a set off tax on interest. d.) legal expense. The legal expense incurred for the for the furtherance of business and profit is deductible against the company income for the year (Monsenego, 2009). ABC Ltd incurred $ 500,000 as legal fees in suing a newspaper who published an article accusing ABC Company of employing illegal foreign workers in its hotels. In which case the company will treat this expense as a deductable one because the company did not employee them with other intention other than to ensure that the hotel operation runs smoothly and that profit are generate. Also, if the employees are in their normal line of duties when the accusation between the company and the newspaper writer occurs then the expense incurred is allowable against company’s income generated for the year. e.) Christmas gift. The company bought iPod torch worth $30,000 to its employees as a Christmas gift this expense is an allowable deduction because the gift will act as a motivator to employees to work with the company and with all their effort and thus company will generate more profit in the future (Jamison, 2007). Also Christmas gift to employees are given to employees before they live the company for holiday and thus allowable expenses because employees receive in the cause of their duties. This gift are an allowable expense to an employer, but they will be charged and taxed on employees inform of benefit in kind. Christmas gift expense will only be exempted from taxation if the gift and the Christmas party are less than $300. Tax deductable expense would accrue to Christmas cost only to the extent of being a subject of fringe benefit tax .Any cost exempted from these would not claim a deduction on income. Cost of Christmas gift can only be included in the employee’s P.A.Y.E settlement agreement with the authority, and this will allow the employer to pay tax on behalf of the employee f.) the expenses of $ 8,000 incurred in purchasing business suits for the CEO is an allowable deduction and not charge to the company director. This is because they are used by the company director and during business hours (Andrew Lymer, 2009). Directors are always the outlook of the company and thus they portray the image of the company in attracting investors and more customers into the company. This will have a significant positive impact to the company’s revenue and hence more profit. Therefore in arriving at the net adjusted taxable profit, the company should deduct this expense as allowable because they were incurred for the furtherance of business and more profit which are subject to taxation Bibliography Andrew Lymer, J.H., 2009. The international taxation system. CCH. p.2006. editors, C., 2009. New Zealand Master Tax Guide. CCH New Zealand Limited. pp.23-34. Jamison, R., 2007. Multistate Tax Guide to Pass Through Entities. Cengage Learning. Kilesh, L., 2010. Model Tax Convention on Income and on Capital: Condensed Version 2010. OECD Publishing. Monsenego, J., 2009. Taxation of Foreign Business Income Within the European Internal Market: An Analysis of the Conflict Between the Objective of Achievement of the European Internal Market and the Principles of Territoriality and Worldwide Taxation. IBFD. pp.298-307. R. A. Friesen, D.Y.T., 2008. Canadian taxation of income arising in non-resident corporations and trusts. CCH Canadian. Rawal, R., 2006. Taxation of Permanent Establishments: An International Perspective. Spiramus Press Ltd. Sandler, D., 2007. Tax Treaties and Controlled Foreign Company Legislation: Pushing the Boundaries. Kluwer Law International. Study Group on Asian Tax Administration and Research, P.D.o.F.R.a.I.O., 2006. Taxation of non-resident and foreign controlled corporations in selected countries in Asia and the Pacific: a project of the Study Group on Asian Tax Administration and Research. GIC Enterprises Co. Read More