The Position of Gullit BV According to the Contract Law in Australia - Assignment Example

INTERNATIONAL TAX LAW Customer Inserts His/Her Name Customer Inserts Grade Course Customer Inserts Tutor’s Name 17th February, 2010 Question 1 The Position of Gullit BV According To the Contract Law in Australia Guilt BV is an in international company that deals with the provision of services to other subsidiary company. It has been in the business for some time and basically understands the laws that pertain to contracts in various nations. Hourllier sarl must have approached it with confidence that they will get a good deal for the business and even if they don’t succeed they will not have to loss through transaction charges. It is therefore necessary for BV to ensure that the transactions that they enter into bear fruit or else, they risk loosing. The company has gone head to send their representative of whom they are paying for all the accommodation expenses. There are various laws that apply to such negotiations in Australia which the company has to adhere to. BV is basically acting as an agent to Houllier to sell its machinery to Australia. Houllier will only be responsible for all the expenses if the transactions by BV led into a contract otherwise they will bear the same. Before such transactions are carried out in Australia, BV will need to find out whom the principal of trade is and if they have the ability to enter into the contract. They also need to find out if the managers that they are entering into the contract are eligible to enter into it or not, the range of clients at their disposal and how credible they are. Such information is necessary to ensure that they are not coned by individuals that are not serious. Before the contract that is to be entered into by BV is considered valid, the government will have to consider if the company is a professional engineer. This is usually ascertained if the company has established its operations in Australia where by its services have been credited. The company may also gain favor if they have somebody in Australia that will assist then in carrying out the contract. Considering that BV has been hired by Houllier, it means that it is an agent that has been carrying out such transactions. The company will therefore be granted the permission to carry out the transactions as long as it is verified that the machine has the ability to function in Australia. The country will also have to assess if the installation of the machine will be of monetary value to the country. There are however no more restrictions for the company to contract in Australia. The Position of Houllier Sarl in the Netherlands and Australia Houllier is the company that is involved in the sale of machineries. It is however relying on the support of another company to act as its agent so that its equipment is sold. Since it has dedicated the entire responsibility to BV it will only need to see if the transaction will be successful or not. BV is only taking the responsibility of marketing the product to Australia but Houllier has the responsibility of installing it and ensuring that it works. Once BV is through with its negotiations and a client has been identified, Houllier will need to go and install the equipment and probably offer some technical assistance to the client. Houllier will hence pay for all the accommodation expenses incurred by Beckham as he entered into the transaction and other related expenses. They will also incur all the transport costs and required to pay all revenues that apply to the exportation of the equipment. In Netherlands, Houllier may have no much responsibility rater than catering for the negotiations that involve the agent company. The company may actually need to find out how the company intends to carry out the transactions and to ensure that the deal succeeds. However, since they trust the company and the contract rules are clear, they may have no much business in Netherlands rather than wait for the results of deal. Calculations of the Profits of Houllier and of BV in Netherlands and its eventual PE in Australia Kin considering the kind of profit that Houllier will benefit from the sale of the equipments; they will have to consider the cost of the transaction in comparison to the price that is going to be set. Houllier has already estimated the value of the contract to be 500 million dollars. This should hence include the accommodation charges for Mr. Beckham and the other remunerations to the company and revenues. There are also some costs that may involve its transportation and installation that will have to be incurred by the company. Before the onset of the transaction, such estimates have to be recalculated by BV company to see if they are realistic or not. It is only after such negotiations that the company will ascertain whether the amount that it will be sold for will be profitable or not. The profit that will be earned by Houlliers will depend on how the equipment is valued in Australia (Frank, 58). The deals will be good if the government sees it as a measure that will improve the economy of the country and vice versa. If the activities of Houllier create a permanent establishment, it basically means that the company will continue benefiting for the establishment of the equipment. The turnover of the company will be slightly higher and will be calculated probably on an annual or quarterly basis. The operating expenses will also be higher considering that they will need to maintain the equipment. Houllier well earn a net profit of 55 while BV will earn a net profit of 5. The profits of the company will change depending on the turnover of the company and the other expenses that the company will incur. Question 2 Tax Consequences for the AG Company The tax liability of the AG Company both in Hong Kong and in Germany will depend on the ultimate income from its products. The honk Kong Company carries out such activities absolutely on a solute condition, the tax liability will be wholly on them. Considering that it is an agent company it will transfer similar expenses to the AG Company in Germany. The AG company will however be relived from most of the tax liabilities considering that it is using a company that has established branches in other countries. The company has been trusted by the countries because of the procedure that it uses in selecting the goods and the selecting the best quality. The company may thus be having certain tax exemptions due to the goodwill that it enjoys from the countries that it carries its business. The Hong Kong Company also takes the responsibility of transporting the products from the company residence to the country where they will be sold. If the company is carrying out business for the very first time with the Hong Kong Company, it will have to incur extra charges before the transactions are approved. The business of selling the products may be absolutely in the hands of the Hong Kong Company but the AG Company acts as a shareholder due to the benefits it will derive from the same. Depending on the countries that the company supplies the products, the tax liability will be different. There are some countries that may minimize want to minimize on the level of such products to the country. This is done to for the purpose of promoting the local industry. Depending on the tax requirements, the Hong Kong Company will pass on the same liability plus its profit to the company. There are other requirements that include the purchase of the raw materials and manufacturing activities that the company will need to pay tax for. The tax rules that relate to such a company will be calculated in accordance to the financial year 2004/2005. The government of Germany recognizes the company as one that is dealing with foreign trade and will hence be required to pay tax in accordance with such requirements. The company is considered under the company law as a corporation that is under the control of another foreign corporation. Their tax liability is therefore low and will not be the same as it would be if the company was directly involved. The income that will be received by the company will be taxed less than 25 percent according to the German tax rule. The German company will be considered to be a share holder of the Hong Kong Company since it controls most of the activities of the company. It may not be having other rights as pertaining to the management of the company, but it holds substantial shares that also contribute to the amount of income that the company receives (Cynthia, 39). The income that is generated by the company can be considered as active income under the German law because it is involved in the manufacture of fashion clothes. Since the company is considered to be a shareholder of the foreign company, the income that is generated may be calculated as dividends that have been received from such a company. In case of an individual, they will be subject to a fifty percent tax exemption. The difference if the Hong Kong Company offered the Services to a Third Party If the Hong Kong Company decided to extend such services to a third party, there would be a difference on how tax shall be treated. There is a tendency of the tax liability to be extended to thirds parties as the product passes through many channels. The beneficiary here will be the revenue authority as it will have more individuals to tax. The products will also sell at a much higher price than it would have been if the company maintains monopoly. High prices of commodity may discourage potential clients from the products and hence being a big blow to the company. Even though the product will have the opportunity of spreading to several regions of the country, they will be going at a much higher price due to value added tax. The number of risks that may be involved in such a situation may also be high which basically means that the parent company in US will pay more. The Hong Kong Company will only need to extend the risk factors to the parent country. The profits of the AG Company in Germany depend on the trading activities of the Hong Kong establishments. There may have been prior agreements on how the trade should be carried out. The tax liability that will be experienced by as the goods move to a third party will be extended to the AG Company in Germany. There are certain tax limitations that the Hong Kong Company is enjoying as the goods are supplied. This is basically because of the good will that the company enjoys due to the high quality products it brings into the market. Before the company undertakes the responsibility of supplying the fashion cloths, it has to ensure that the goods or of good quality to guarantee nit good sales. Transferring the responsibility to a third party will mean that the products will not be as trusted as they currently are being trusted by the clients. It will not be easy for the other individuals to convince them that the products are actually the same. It means therefore the market share of the company will be low which will affect the profits earned on such products. Question 3 Hybrid Debt Convertible Preferred Equity Certificates First we will need to identify where the funds that are being borrowed from Luxco fall under equity or debt for the purposes of taxation under Luxembourg law. Money that has been received in form of a loan is characterized under hidden capital contribution or rather equity. This is because this money has been borrowed specifically for the purposes of carrying out the activities of the company. For a loan to be characterized into equity there are a number of conditions that should be fulfilled which include, the individual being loaned the money should be a shareholder of the company with not less than 10 percent or acquisition price that is not less than EUR one million two hundred thousand; if the loan is given under certain special circumstances and that they are not being offered by an independent party (Ayesha, 130). This basically means that the loan can only be paid back after liquidation or winding up of the individual borrowing or else the individual is allowed to pay after at least forty years. The loan may also be characterized as hidden capital if it is subordinated, if it is dependent on the share capital that is paid up, the lender has not given the borrower a definite date in which to repay the loan, the amount of interest to be charged on the borrower will be determined by how much profit they make, the borrower has a role to play in ensuring that the lender earns a profit, if the borrower also has certain rights that are related to his loan. In this case there are three borrowers, Luxco needs a loan from the US investor, Huldco also needs a loan from Luxco and finally operating cost needs a loan from Luxco. We will identify the tax advantage of Luxco over the loan that it will receive from the US investor as well as the loan that is to be extended to Holdco and operating cos. The main reason why Luxco is borrowing money from the US investor is because they want to carry out its trade activities with Holdco. The loan that is borrowed will be lent to Holdco to assist in the acquisition process. Luxco will have a tax advantage considering the fact that the loan it borrowed from the US investor qualifies to be hidden capital. This is because the company borrowed it from an independent individual who is a US investor. The investor holds over ten percent of shares in the company and is hence benefiting from its operations. There is no set date in which the loan should be repaid back since the investor is also part of the company, this basically means that the loan may be repaid back when the company winds up or goes into liquidation. Holdco Company needs a loan from Luxco which it intends to carry out certain business activities of the company. Holdco is therefore not obliged to repay back the within a stipulated period of time considering that it is using the money to carry out the activities of the company. The interest rate that it will be charged will depend on the amount of profit that they make. The main reason why Holdco is undertaking the business activities is because it wants to assist Luxco to fulfill its business undertakings. The activities are thus carried out on mutual agreement and thus requiring the company to be lenient on it. The loan that has been taken by Holdco will be used for activities that will determine the amount of profit that are to be made by Luxco. The loan is hence attached to its profits which qualify the loan to be equity. According to taxation rules of Luxembourg the company will have tax advantages over the loan that it took from Luxco. Operating cost is also considering a loan with Luxco, this company has not been mentioned any where in the business activities of either Luxco or Holdco. It basically means that it is taking the loan for other reasons that have not been mention. If the company gets the loan from Luxco it will not qualify under the Luxembourg tax rules for equity. The normal rules that pertain to deduction and the repayment of loan will apply to the company. Luxco will hence have all the authority to set for them the date in which the loan must be repaid as well as charging interest at an appropriate rate. Unlike Holdco whose rate of interest will be determined by the profits made, operating cost will be required to pay the interest rate whether the business undertakings earn them profits or not. Luxco will also not have to wait for at least forty days or when the company runs into liquidation for it to demand the repayment of the loan. In the tax treatment of hybrid securities, the US government requires that a company pays a certain percentage of interest to the loan acquired despite the income it generates. This is in consideration of the requirements of a company whose loan qualifies to be equity. The law recognizes the sacrifice made by an individual or corporation to lend money to another company eve n if the loan directly affects them (Cynthia, 56). The company is hence obliged to set a certain maturity rate for the loan when the loan will fully be repaid. There are also certain remedies that will apply if the company defaults in its repayment. There are provisions under the law where the creditor has the right to sue the debtor incase the agreed terms are not followed. The creditor may also subordinate to the claims which pushes him to be a holder of the equity. Certainty of return is an assurance to the creditor that that money that has been lent will certainly be paid back to them. They are also entitled to receive the interest that has been accrued on the loan according to the terms and conditions. The US law aims at ensuring that the creditor does not suffer simply because they are parties to the debtor. Question 4 Holding Companies – Big Apple Case Big apple LLP is considering the option of carrying out its investments overseas in a country that will guarantee it tax advantage. This will be possible if the country finds a subsidiary company in the countries that will grant it tax advantages. This will also depend on the amount of share capital that such subsidiary companies hold with big apple LLP and the taxation rules that relate to it. Big apple has 100 percent subsidiaries in Taiwan that is estimated at 80 euros, 120 million euros in Thailand and 75 million euros in Singapore. In Chinese it holds an average of 30 percent which is equivalent to 175 million. In determining the advantage that the company will have over taxation, the revenue authority will look at the percentage rate as well as the total amount that the company owns in terms of share capital in the company. To assist it in carrying out such businesses, the company has engaged Ernst and young with the responsibility of designing a mechanism that will ensure that it gets the best deal. This basically means that the company will look at the various options available world wide and then advice the company on the best procedure to be undertaken. In doing this Ernst will have to come with a mechanism that will ensure that the maximum acquisition dept is pushed down so as to utilize the expenses on interest. The company will also need to avoid duty on capital as well as withholding taxes. One of the tax advantages that the company will probably have is in identifying any opportunities for permanent establishment (Richard, 96). A company will always have certain tax exemptions if it is realized that its operations in a foreign country will create permanent establishment. This means that Apple Company will have its operations in that country for a longer period of time and that its business activities will be beneficial to the country. It will hence need to consider the kind of services and products that it needs to extend to such a nation and how much they are needed. Now that it has a big number of countries to choose from, they will consider the kind of products that they are in need of and establish their business undertakings there. This will guarantee the country that as much as they are coming to derive some revenue from them; they will also have some benefits as the operations earn them substantial income. Apple Company will need to work under another resident company so as to relieve it from foreign taxation rules. The company ahs 100 percent share capital in Taiwan which basically means that it has a good will. Such a percentage of shares are able to make it have an advantage in carrying out its business undertakings. Parent companies are usually required to pay high tax compared to foreign subsidiaries. If the company will hence establish some subsidiaries where it will have permanent establishments, the rate of tax charged on it will not be high. If the company has to carry out its operations in Taiwan, it will align itself with a resident company that will carry out the operations on its behalf. Big apple may undertake the risks that will be incurred by the Taiwan Company as it involves in the business. The Taiwan Company will mainly carry out such operations as its own but redirect the benefits to big apple. The rate of interest will be determined by the agreements that the companies agree on. The Opportunity that Big Apple LLP Has On Acquisition Debt at the Level of Separate Subsidiaries If LLP decides to have subsidiary companies in all the countries that it desires to carry out its operations, there will be a lot of tax liability that it will face. The subsidiary companies shall be considered as foreign units and thus liable to tax regulations. Even though the rate of taxation will be cheaper compared to what the parent company shall pay, it will be higher than what the other local establishments will pay. The same may be considered if the company believes that its operations are worth what it may spend. The company may however decide to utilize the share capital that they have in the countries and engage them in such business undertakings. The amount of income charged shall be treated as dividends since the company will only claim being a contributor of their share capital. Having subsidiary companies will relieve from the burden of taxation that could have been charged on it if it were parent. There are a number of suitable locations that can be considered by the company where they will be guaranteed reduced tax exemption. There are countries that lie within CFC that can enjoy a tax deduction and exemption from their establishments. Such countries should be considered as priority by big apple LLP. Examples include; France, Denmark, Hungary, Italy, Australia Germany, Canada, Indonesia, Japan and Finland. Some of the tax exemptions that CFC grants to its members are exempt specific jurisdiction and motive exemptions. The advantages will even be more if the company engaged a resident company in its business establishment. The CFC law overrules the USA treaty and thus giving countries in such an establishments taxation advantages. The same has however caused a conflict in Germany which has made the company to deny CFC such legislations. Conclusion In the world where international business undertakings have become the order of the day, tax authorities are also gaining extra revenue from such units. This has prompted most business units to look for a method that will ensure that the tax liability has been lifted on them. Even though tax is revenue that is required by the government to undertake its day to day operations, people have looked for clever means to boycott them. This is done by ensuring that the tax rules are adequately utilized for their advantage. Tax evasion is a daily strategy being practiced by business units to ensure that they get almost the full amount of what they have worked for. This has become so considering the tax brackets that are followed by the government to ensure that those who generate more also pay more. A business unit can not deny the opportunity to grow for it to avoid paying taxes, it has hence been discovered that if the liability is spread, the total tax mill be less. It is for this reason that the world is experiencing a lot of international partnership in business. They run their international enterprises as local companies to avoid the extra expenses charged on foreign units. Works Cited Coleman, Cynthia. Principles of Taxation Law. Asia Pacific: Thomson Legal & Regulatory, 2008. Gilders, Frank. Understanding Taxation Law: An Interactive Approach 2009. LexisNexis Butterworths, 2008. Krever, Richard. Australian Taxation Law Cases 2008. Asia Pacific: Thomson Legal & Regulatory, 2007. Macpherson, Ayesha. Hong Kong Taxation: Law and Practice 2008-09. Chinese University Press, 2008. Read More