Page 87 - DCOM308_DCOM502_INDIRECT_TAX_LAWS

Indirect Tax Laws

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Case Study International Corporate Tax case study

A U.S. corporation has worldwide operations and manufacturing facilities. Nearly all of
these foreign entities were historically held directly by one of the consolidated U.S. entities,
creating a ‘flat’ corporate structure. The European headquarters is located in Western
Europe, with the largest manufacturing facilities outside the U.S. in four European, Middle
Eastern and African countries. What are the issues, and what approach has KPMG taken?

Over the past ten years the company has made several business acquisitions in Europe.
The funds for these acquisitions were sourced from the U.S. using cash reserves and/or
debt.

Prior to 2004, approximately 70 percent of the company’s sales and income came from
products manufactured in the U.S. Because of the location of the majority of third-party
debt, there was tremendous pressure to keep the flow of cash to the U.S. high enough to
service the interest on this debt. This practice resulted in additional U.S. taxes (to the extent
the U.S. tax rate was higher than the foreign jurisdiction tax rate plus any withholding
taxes) and the need to find a way to utilize foreign tax credits.
In 2004 the company acquired a major European business, increasing market share in a
particular business line. The acquisition was designed to create corporate synergies;
consolidate functions, leverage customer relationship across business lines, strengthen
corporate controls and reduce costs.
The acquisition meant a significant increase in worldwide sales. It also saw 60 percent of
global revenue and income coming from non-U.S. manufactured products. Most of the
funds used to acquire the European business were financed with third party debt by the
U.S. entities. As a result of this transaction, the misalignment of third party debt and
income was further exacerbated.

In addition, the company faced a mounting problem of integrating their existing European
management structure with the acquired, and larger, business. In order to achieve the
synergies contemplated as part of the acquisition, integrate the acquired company’s back-
office software and functions into the acquirers and significantly reduce the two companies
total overhead, the U.S. Corporation contemplated a strategic realignment of functions
and activities between the two companies.
Issues

 Can the company create synergies between the older European, Middle Eastern and
African (EMEA) companies and the new business?
 Can the company source its debt in the jurisdiction(s) with the largest cash flows,
eliminating the need to repatriate European earnings to the U.S.?
Contd....

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