Order Description
answer the following questions:
Question 1 (worth 15 marks)
Roger a non-resident of Canada would like to make several investments in Canada including the purchase of a 30% interest in a publicly traded resource company, a 25% interest in shares of a Canadian real estate company whose assets are used to run a nursing home, and a 15 percent interest in a Canco that owns real estate.
Roger has heard that there may be benefits to investing through a non-resident holding company instead of directly. He has heard that several jurisdictions are popular for investment in Canada including, Barbados (a Barbados limited company owned by a Barbadian international business corporation), the Netherlands, Luxembourg and Cyprus.
He asks you to provide information about which of these jurisdictions you would suggest for his investment. He is concerned in particular about the most advantageous tax treatment of dividends paid by the Canadian corporation to the HOLDCO and tax liability on the disposition of the shares.
Roger would also like your views about what risks he may face if he uses a holding company in one of these jurisdictions to invest in Canada. In particular he would like to know if Canada would challenge this transaction. He has also heard that the OECD has released a new report on Treaty Shopping (Action 6) and queries whether the proposed arrangement would be subject to challenge based on the guidelines in that report. If so, what would be the basis for the challenge and the probability that the challenge would be successful?
Question 2 (worth 20 marks)
A Ltd. is a company resident in State A, specialized in the production and distribution of coffee capsules. Between 2008 and 2014 A Ltd. products were sold in State B by B Ltd., an independent distributor which was buying and selling A Ltd. products. Ninety percent of B Ltd.’s turnover was generated by the sales of A Ltd. products. In 2014, B Ltd. was acquired by A Ltd. After the acquisition, B Ltd. was converted into a sales agent and distributed A Ltd.’s products on an exclusive basis for A Ltd. The coffee capsules are stored in a warehouse in State B managed by an independent service provider. B Ltd. employees decide the inventory levels to be kept in the warehouse based on sales forecasts and actual sales in State B. The contract between A Ltd. and B Ltd. establishes that:
B Ltd. acts in the name and on behalf of A Ltd.;
B Ltd. accepts orders, displays quotes and concludes sales contracts without A Ltd.’s prior approval;
the terms of the sales, special offers and advertisement campaigns are defined under A Ltd.’s general sales strategy, and – B Ltd. can grant credit extensions to clients on behalf of A Ltd.
A Ltd. reported taxable income in State B equal to zero, on the grounds that the income attributable to the permanent establishment (PE) in State B is equal to the fee paid by A Ltd. to B Ltd., which was the same as the amount paid in prior years and considered to be at arm’s length. A Ltd. relies on Article 7 of the treaty which provides that “profits attributable to a permanent establishment are those that it would be expected to make if it were a distinct and separate enterprise.” Assume you are acting for the revenue authorities in Country B which follows the OECD Model Treaty. What arguments would you make for attributing taxable profits to the permanent establishment in Country B?
Question 3 (worth 8 marks)
Xco is a resident of Canada and owns all the shares of GCo which is resident in Germany. GCo requires additional financing to expand its existing active business in Germany. This financing could be provided in a variety of ways. For example,
(a) GCo could borrow the necessary funds;
(b) Xco could borrow and lend to GCo;
(c) Xco could borrow and subscribe for additional shares of GCo or make a contribution of capital to GCo.
Instead, Xco incorporates a wholly-owned subsidiary, Barco, in Barbados. Barco qualifies as an international business corporation under Barbados law and is subject to a tax rate of approximately 2.5 percent. The tax treaty between Germany and Barbados provides for no withholding tax on interest.
The tax treaty between Canada and Germany provides for a 15 percent rate of withholding tax on interest. Xco borrows the necessary funds, $200 million, from a Canadian bank and subscribes for shares in Barco in that amount. Barco then loans the funds to GCo with interest payable at an arm’s length rate. The interest payable by GCo to Barco is deductible in computing GCo’s income under German tax law. Barco pays periodic dividends to Xco which Xco uses to fund the interest payments to the bank.
Do you think the above financing structure is more tax-effective than that in (a), (b) and (c) mentioned above? Why?
Question 4 (worth 20 marks)
Trinatrek Inc. is a Canadian engineering company with considerable expertise in:
a) both design and manufacture of gas shipping containers. It is currently considering entry into the U.S. market using the three formats outlined below.
Format 1
1. Send employees to the U.S. on short business trips to solicit sales for the large pressurized containers it manufactures to ship gases to customers and to find customers for the pressurized gas itself.
2. Contract for the long term use of transportation facilities (such as pipelines, railways) in the U.S. for the delivery of the shipping containers and gas to its U.S. customers.
3. Charge a sizeable deposit on the pressurized gas containers used by Trinatrek Inc. to supply gas to its customers. This deposit will be forfeited to Trinatrek Inc. if the containers are not returned.
4. Supply the containers for a reduced amount to its favourite U.S. customer in return for access to a back office and phone from which to make customer calls and supply support services.