Page 129 - DCOM508_CORPORATE_TAX_PLANNING

Corporate Tax Planning

Notes 19. The person responsible for making payment of the income distributed by the venture
capital company shall be liable to pay tax to the credit of the Central Government within
……………from the date of distribution or payment of such income, whichever is earlier.
20. The Venture Capital Company or Venture Capital Fund is not liable to make payment of
dividend tax under …………..

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 fl ow 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 fl ows,
eliminating the need to repatriate European earnings to the U.S.?
Can the company reduce its overall third party debt?
Can the company restructure its EMEA operations to take advantage of low-tax
income to service newly-aligned third party debt?
Can the company manage the increased tax burden arising from its non-U.S.
operations? Contd...

124 LOVELY PROFESSIONAL UNIVERSITY