Ms. Grant walks into your office, gives you the following scenario, and asks for

Question

Ms. Grant walks into your office, gives you the following scenario, and asks for your advice in setting up the entire structure. Ms. Grant owns a franchise by the name of “Who likes Milk”, which produces various sports milk drinks. She currently has a US factory, which produces slightly more of the sports drinks than can be consumed by the US market. She seeks to start selling in the European Union and potentially overseas in Asia. She realizes two things, first she might need another manufacturing plant, either here or abroad, and she will need sales help. She understand she might have a sales force in various countries and a distribution center someplace. She is looking for some basic guidance and tax planning.

The name of the US Corporation is Who Likes Milk, Inc.. It currently owns all the franchise rights along with the secret processes to make milk sports drinks, in such flavors as Chocolate Mocha Banana, and the wildly popular Guava-peach flavor known as Guavee.

Here is some additional information you will need. First, there is a tax treaty between the US and every country she seeks to operate in based upon the US Model Treaty. Second, there are only three places, which can manufacturer the sports drink, the US, Mexico and England, their tax rates are 35%, 20% and 40% respectively. The average tax rate in the EU is 40% and in Asia is 10%.

She expects the new markets to quickly turn a profit. Please advise her regarding the structure of opening up to new markets, the potential tax issues and some planning ideas.

Explanation / Answer

Today’s entrepreneurs face a world of opportunity but also a world of competition. That means finding new markets is often a matter of survival. First, do an assessment of your company’s strengths and weaknesses, and then consider why you want to go into a particular market,” says Frank Pho, Vice President, Global Expansion, at the Business Development Bank of Canada (BDC). “Is it to increase your revenues, reduce your costs or replace customers lost during the recession? The answers will help you decide where to go.”

Ta Treaty help in mitigate the effects of double taxation.Tax treaties may cover income taxes, inheritance taxes, value added taxes, or other taxes.In general, the benefits of tax treaties are available only to persons who are residents of one of the treaty countries.Taxation of foreign income depends on the legal form in which the company conducts its business in the foreign country. There are several ways that a company can market its products or services without having a foreign presence. It can hire foreign sales representatives or it can license its patents or trademarks to foreign companies. How that income is taxed depends on the tax treaty, if one exists, between the US and the foreign country, if one exists.

By arranging their international affairs judiciously, corporations can lower their tax rate considerably. For instance, it was recentlyreported that Apple paid only 1.9% in corporate taxes on income sourced outside of the US — $713 million in taxes on $36.8 billion of foreign pretax income. If that income had been sourced in the US, then Apple would have had to pay a 35% rate, which would equal $12.88 billion, a difference of more than $12 billion! Many large international corporations, such as Facebook, Google, and Starbucks, also pay lower corporate taxes on their foreign income. However, even foreign subsidiaries in European tax havens still pay considerable sums for employment and value-added taxes.

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