International Tax Management

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International Tax Management

• Aaron Hasenkamp
• April 9, 2006

2
Discussion of

• Branch versus Subsidiary status.
• Intertemporal Considerations.
• Mathematics of how profits change as the transfer
  price changes.

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Branch versus Subsidiary status.

• Main difference is the timing of taxation.
• The establishment of foreign branches centralizes
  finances and taxes are paid when earned.
• The establishment of foreign subsidiaries
  decentralizes finances and taxes are paid only
  when profits are repatriated.

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What is the tax difference between a branch and a
subsidiary?

• Consider the texts example of CC Enterprises, a
  manufacturer of ski paraphernalia and sporting
  goods. There is only a home office in Chicago
  and no domestic profit or loss. What is
  important however is their overseas interactions
  and they desire to know what the most profitable
  configuration may be

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Branch versus subsidiary status without
repatriation. Principle IV

• If there is no repatriation of profits, establish
  profitable operations as subsidiaries. If a
  foreign operation posts losses rather than
  profits, it is advisable to set up as a branch if
  the losses can be used to offset profits
  elsewhere, but to set it up as a subsidiary if
  this is not the case

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Allocation of Subsidiary Profits Without
Repatriation.

• To increase subsidiary profits, headquarter
  overhead costs are allocated to high tax
  countries
• Canada 15,000--gt 5,000
• Britain 50,000--gt 55,000
• Ireland 20,000--gt 10,000
• Germany 65,000--gt 90,000
• Japan 30,000--gt 20,000
• Total expenses 180,000180,000

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Allocation of Subsidiary Profits Without
Repatriation. Principle V

• If there is no Repatriation, show subsidiary
  profits in the lowest-tax jurisdictions by
  allocating costs to the highest-tax
  jurisdictions, without making profits negative.

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Allocation of Subsidiary Profits Without
Repatriation.

• It is also possible to increase profits in
  low-tax jurisdictions by altering the transfer
  price.
• The transfer price is changed from 16 to 18 in
  the low tax

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Allocation of Subsidiary Profits Without
Repatriation. Principle VI

• If there is no repatriation, show subsidiary
  profits in the lowest-tax jurisdiction by
  following a simple rule
• If one subsidiary is selling to a foreign
  subsidiary, set the transfer price as high as
  possible when TgtT and as low as possible when
  TltT, without making profits negative.

10
Allocation of Subsidiary Profits Without
Repatriation.

• Britain and Germany have decided to impose a 20
  import duty on the transfer price.
• What does that mean for CCs profitability?
• How does CC recover?

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Allocation of Subsidiary Profits Without
Repatriation. Principle VII

• If there is no Repatriation of profits, minimize
  total subsidiary taxes paid in the presence of
  import tariffs by comparing T to TTd(1-T)
• Use the high transfer price if Tgt TTd(1-T),
  and use the low price if the opposite occurs,
  without making profits negative.

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Profit Repatriation Through Dividends

• What happens when repatriation becomes necessary?
• What is the cheapest way for CC to move its
  money to the U.S.?

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Profit Repatriation Through Dividends. Principle
VIII

• Repatriate profits from branches first because
  this action is without tax consequences.

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Profit Repatriation Through Dividends. Principle
IX

• If there is full repatriation of profits, and
  there are no excess tax credits, the decision
  between establishing a branch of subsidiary
  generally does not matter. If there is full
  repatriation of profits, and there are excess tax
  credits, establish branches to generally avoid
  the withdrawing taxes on profit repatriation. As
  before, establish unprofitable operations as
  branches to receive immediate tax benefits.

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Profit Repatriation through dividends

• Should CC need to repatriate only a portion of
  the money, what is the best course of action?
• Which subsidiaries should it tap first?

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Profit Repatriation Through Dividends. Principle
X

• If there is partial repatriation from
  subsidiaries, pay dividends from subsidiaries
  where the sum of the withholding tax and the
  additional tax liability to the U.S. Government
  is the lowest. If there are several
  opportunities with the same marginal cash
  outflows, repatriate from countries which would
  result in the least excess tax credits.

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Does Principle IV Conflict with Principles VIII
and IX?

• IV implies that firms should have a clear
  preference for subsidiaries if no repatriation is
  to occur.
• VIII and IX imply that a firm should have a
  preference for branch status if substantial
  repatriation is to occur.
• What is best for partial repatriation?

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Profit Repatriation Through Dividends. Principle
XI

• If there is partial repatriation from foreign
  operations, compare the advantage of tax deferral
  associated with a subsidiary against the
  withholding taxes incurred upon repatriation from
  the subsidiary in deciding whether to establish a
  subsidiary or a branch.

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Conclusion

• The establishment of a branch or subsidiary is
  dependant on the specific needs of the firm,
  becoming significantly more complicated if
  repatriation is necessary.
• Furthermore, should an investment be slated to
  continue beyond a single period issues such as
  the percentage of funds available for
  reinvestment in foreign countries and local rate
  of return become increasingly important.

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Questions?