Running Head Quattroporte Inc Foreign Based

As executives with the Canadian-based software company, Quattroporte Inc, we were charged with identifying the most suitable location for opening a foreign-based subsidiary to process sales outside of North America. Offshoring will help maximize profits for our organization which is in a period of hyper growth. As part of this study our team will be looking at the jurisdictions of Ireland, Gibraltar and the Isle of Man. To analyse the suitability of the aforementioned jurisdictions we will be discussing issues of globalization, tariff and non-tariff trade barriers, trade regulations, regional trading arrangements, international factor movements and multinationals, foreign exchange and risk strategies, international/regional banking factors, professional services support, taxes, capital flow/repatriation of profits, IP rights, political and policy direction, and country risk/freedom. Selection criteria will be explained and weighed for each jurisdiction. Results of this analysis will yield information which will inform managerial decision-making in establishing our foreign-based subsidiary.

IRELAND

Background

Over time, Ireland has become a significant offshore jurisdiction. A full-fledged member of the European community, it has managed to attract significant international business commitments through its attractive taxation reductions. Lying to the West of Great Britain, having gained independence from the latter in 1922, this English speaking country of 3.5 million (1.2 million live in Dublin) is governed by a democratically elected parliamentary government.

Population – 4.7 million

Labour force – 2.1 million

Unemployment rate – 14.6%

Public debt – 118% of GDP.

Communication – Ireland possesses a modern digital system using cable and microwave radio relay.

Transportation – Ireland benefits from an extensive network of airports (16), railways (3,237 km), roadways (96,036 km), waterways (956 km), and a merchant marine (31).

Government

Ireland is a republic and has a parliamentary system of government. The head of state is the elected President of Ireland who serves for a 7-year term. Ireland also has a prime minister (called the Taoiseach) who is nominated by the House of Representatives (called Dáil Éireann) and then appointed by the president. Besides the lower house, the House of Representatives, there is also an upper house, the Senate (or Seanad Éireann). Ireland is a member of the European Union and one of the original 11 countries to adopt the euro as its currency in 1999 [] . Ireland is politically stable and their government is well on its way to reduce planned reductions of public servants.

Economy

Since 2008, Ireland has suffered from a significant debt-laden bust following the “Celtic Tiger” boom which had been predicated on debt and an unsustainable housing bubble. Although they experienced a significant drop in economic activity following the 2008 financial crisis, the Irish government has made significant efforts to rectify the situation. This has included the establishment of a National Asset Management Agency (NAMA) in 2009 and across-the-board cuts in spending [] .

Half of the top 50 banks and 20 insurance companies are hosted in Ireland. In 2008 the International Financial Services Centre (IFSC) investments were equivalent to 11 times Ireland’s GNP. The Irish Stock Exchange hosts about a quarter of international bonds.

Taxation

Since October 1999, all Irish companies are liable to Irish corporation tax (regardless of where they are controlled or owners’ country of residency), they are no longer tax-free entities and must therefore pay Irish corporation tax, register with Internal Revenue Commissioners, and file annual tax returns.

They have also established an extensive network of tax treaties which include the provision of exchange of information. This makes it important to ensure that management is based somewhere fiscally neutral.

The following three principal elements make Ireland stand out as a tax haven [] :

Corporate Taxation in Ireland is set at 12.5% on profits for all trading companies (non-trading income is taxed at 25%). A 25% corporate tax rate relates to passive income whereas capital gains tax is 30%.

Near-absence of transfer pricing rules (source of loopholes in international tax) lets multinationals artificially relocate their profits away from Ireland, usually via transfer pricing mechanisms, to lower-tax or zero-tax jurisdictions. As such, large portions of multinationals’ profits are sheltered from Irish tax.

Membership in the European Union grants Ireland political stability and special access to European markets, membership has also kept it tax haven blacklists (e.g. Caymen Islands and Bermuda), and many countries that would apply withholding tax on interest paid to traditional tax havens do not apply them to Ireland because it’s classified as “onshore”.

Relationships with International Bodies

Overall, Ireland’s place within the European Union, weak rules on transfer pricing, and broad network of tax treaties make it particularly attractive for offshoring. Case in point, according to a recent study, 60% of companies pay no to virtually no corporation tax. Effective tax rates were estimated at 7.3% in Ireland compared with 37% in France and 26% in Canada [] . This has resulted in other European countries crying foul play and also triggered “beggar-thy-neighbour” policies. They still have much work to do to implement better financial transparence.

Intellectual Property Protection

Ireland ranks 7th on the Global Intellectual Property Index (GIPI) [] . Ireland is a common law jurisdiction with an independent and efficient court system, a wide range of legal protections for the creators/owners of Intellectual Property Rights and the possibility of obtaining generous state grant assistance with research and development projects.

Isle of Man

Background

The Isle of Man is an internally self-governing dependency of the British Crown and the people are British citizens. It is not formally part of the United Kingdom but is within the British Isles. The Isle of Man has its own currency the Isle of Man pound (Manx) that runs at par with the UK pound. Douglas is the Capital city and the largest town and the entire island is very small at 570 sq. miles. The primary language for business is English. The unemployment rate is very low at 2.6% and the standard of living is high with a life expectancy of 80.76 years and has a very low crime rate.

Population – 85,421

Labour force – 41,790

Unemployment rate – 2%

Public debt – Nil.

Communication – The Island is known to have a world-class telecommunications infrastructure and offers a full range of services including voice and data communications.

Transportation – The Isle of Man is very small and has therefore very little transportation infrastructure. It has one airport, a small railway (63 km), roadways (500 km), and a sizable merchant marine (98). Although 321 ships are registered in the Isle of Man, 223 of these are foreign owned.

Government

The head of the Isle of Man Government is the Lieutenant Governor. The executive head is the Chief Minister. The capital contains both the government offices and the parliament chambers. (Tynwald). The Isle of Man is claimed to be the oldest continuously operating government in the world. It is a dependency of the Crown so is able to set many of its own laws except on issues of defense, foreign affairs and consular services. Isle of Man contributes financially to the UK for these services and protection.

Economy

The Isle of Man has a very impressive track record regarding its economic success. “The Isle of Man has been a remarkable economic story in the past three decades and has benefited from 28 years of continuous economic growth” as quoted from an Ernst and Young Report, Isle of Man: Economic Report dated May, 2012. The GDP of £3.2 Billion ($4.9bn US) is very high for a population of only approximately 85,000 people [] . The Isle of Man also enjoys full and free access of Industrial and Agricultural goods movement with the European Union under Protocol 3 of the Treaty of Succession. Isle of Man has been successful in diversifying its economic base away from Agricultural to more diverse selection including financial services, aerospace and information & communication technology (ICT).

Taxation

The Isle of Man sets its own taxes independently of the United Kingdom. The Isle of Man has no separate corporate, estate or inheritance or gift taxes. Income tax is levied at relatively low rates and VAT (Value added tax) is applied in a very similar manner as the UK. Companies are subject to income tax and not a separate corporate tax. Income tax is often zero unless they are engaged in earning profits from Isle of Man land e.g. rental income or property development or from banking then the rate of tax is 10%. Residents of the Island pay up to 20% of their total income to a maximum of 120,000 in tax which has proven attractive for the very wealthy. Capital gains tax is zero [] .

Since many view the Isle of Man as a tax heaven there are certain risks with this location. For example the Subsidy towards VAT has been removed by the UK to the Island in the amount of £200 million yearly which has a big impact on their ability to keep taxes at zero. Also, there can be a negative connotation from working out of an area that is known to be a tax heaven.

Relationships with International Bodies

The Isle of Man became recognized as part of the WTO under the United Kingdom’s ratification agreement in 1997. Also OECD (Organization for Economic Cooperation and Development) recognizes the Isle of Man as a member under the United Kingdom. Other bodies such as FATF, FSF and the IMF all have the Isle of Man in good standing with high levels of controls and protections in place. IMF had done a detailed assessment of the Isle of Man’s regulatory and anti-money laundering framework in late 2002 and determined that Isle of Man had a high standard of compliance with all assessed areas [] .

Intellectual Property Protection

The Isle of Man has a modern system of copyright protection. Computer software is protected in the same manner as prescribed in EC directives. The Isle of Man does not have its own trademark register but the UK system extends to the Island. UK trademarks are protected under Isle of Man civil law. Similarly, UK Patent law extends to the Island and Isle of Man law protects UK registrations. The UK ranks in 2nd place on the Global Intellectual Property Index (GIPI) slightly behind 1st place Germany [] .

GIBRALTAR

Background

Strategically significant, Gibraltar was relinquished to Great Britain by Spain in the 1713 Treaty of Utrecht. This led to the British garrison being declared a colony in 1830. In 1969, Gibraltar was granted autonomy by the UK which led Spain to close their border and sever all ties. Between 1997 and 2002, the UK and Spain held talks aimed at establishing a temporary joint sovereignty over Gibraltar. This move was however rejected by most Gibraltarians following a 2002 referendum. Tripartite talks have continued since 2004 with the hopes of resolving current disputes and developing cooperation agreements dealing with such things as taxation, communications, customs services, and other contentious issues.

In 2009, a dispute over territorial waters gave rise to sporadic non-violent confrontations between Spanish and UK naval patrols. Of particular importance is the non-colonial constitution which was enacted in 2007, and the European Court of First Instance recognizing Gibraltar’s right to regulate its tax regime. The UK is however still responsible for looking after matters of defence, foreign relations, internal security, and financial stability [] .

Population – 29,034

Labour force – 12,690

Unemployment rate – 3%

Public debt – 7.5% of GDP

Communication – Adequate, automatic domestic system and adequate international facilities.

Transportation – The Isle of Man is very small and has therefore very little transportation infrastructure. It has one airport, few roadways (29 km), and a small merchant marine (13). Although 267 ships are registered in Gibraltar, 254 of these are foreign owned.

Government

The monarchy is hereditary; governor appointed by the monarch; following legislative elections, the leader of the majority party or the leader of the majority coalition is usually appointed chief minister by the governor.

Economy

Gibraltar adheres to the common law charter and its workforce is highly-educated. The Gibraltar Pound serves as the official unit of currency (in monetary union with the UK pound sterling). No foreign exchange regulations are in effect and complete freedom exists to move funds in and out of Gibraltar as well as the ability to convert funds to any other currency.

Taxation

The overall corporate tax rate is 10%. Companies pay tax on income that is accrued and derived in Gibraltar. If it can be proven that said income is not accrued and derived in Gibraltar, the income is non-taxable. The company can apply to the Commissioner of Income Tax to have this confirmed in an advance tax ruling (subject to certain conditions and restrictions). Furthermore, there are is Capital Gains Tax in Gibraltar [] .

Relationships with International Bodies

As a member of the European Union, Gibraltar is subject to almost all European Law. Gibraltar can already take advantage of European Union directives that facilitate cross border business within the European Union in respect of insurance, banking and investment services. Gibraltar licensed or authorised financial institutions can provide services throughout the EU and EEA without having to seek separate licenses or authorisation in the ‘host’ Member State. This is known as the “passporting” of financial services.

Intellectual Property Protection

A company’s trading name, product/service brands, associated strap lines, logos and other aspects of get-up or brand image can be protected as registered trademarks. A trade mark must have been previously registered in the UK prior to being registered at Gibraltar Companies House. Patents must also have been previously registered in the UK

prior to registration with Gibraltar Companies House.

Recommendation

To come to a recommendation we compared each jurisdiction using the eight risk factors identified in Table 1. As such, each factor was assigned a value from 1 thru 5, 1 being very low risk and 5 being very high risk. This risk analysis allowed us to identify which jurisdiction provided the least amount of risks based on the selected criteria. Such data provided valuable insights into the relative stability of the economies as a whole, their ability to keep taxes low, the repatriation of funds back to the head office and highlights known risks associated with each country.

Table 1: Risk Assessment for jurisdictions

Ireland

Isle of Man

Gibraltar

Economy

Low Risk (2) in recession following collapse of the real estate bubble & high unemployment

Low Risk (1) strong GDP;

low unemployment

Low Risk (1)

strong GDP;

low unemployment

Government

Low Risk (2)

Low Risk (1)

Low Risk (1)

Taxation

Low Risk (2)

Low Risk (1)

Low Risk (1) very straight forward

Repatriation of profits

Low Risk (1)

Low Risk (1)

Low Risk (1) very easy and straight forward

Relationships with International Bodies

Low Risk (1)

Low Risk (2) some countries are disagreeable with its territorial legal status

High risk (4):

major territorial ownership and political disagreement with neighbouring Spain

Intellectual Property Protection

Low Risk (1)

Low Risk (1)

UK rules

Low Risk (2) UK rules + Gibraltar registration

Technology & Infrastructure

Low Risk (1)

Low Risk (2)

adequate but not excellent

Low Risk (2) adequate but not excellent

Costs of setting up merchant account with internet low cost credit card transactions processing

Low Risk (2) competitive internet based rate but more expensive than offshores

Low Risk (1) Competitive internet based rate

Low Risk (1) Competitive internet based rate

Total Risks Summary

12

10 (Lowest)

13

Best Choice

We also looked at other factors including GDP, unemployment rates, and various tax rates (corporate tax rate, capital gains tax, and stamp tax) to determine overall suitability (see table 2). Once again, the Isle of Man stands out due to its 0% tax rate and sound economic indicators.

Table 2: Summary Stats

We also looked at some financial considerations in dollar amounts. As such, Table 3 provides some financial data on the impact of taxation if our company made a profit of $5M or $55M and we show the after Corporate tax amount resulting from such calculations. We also added a column to show the impact on profits if we remained in Canada and did not use a subsidiary. As you can see the Isle of Man has a distinct advantage over all other competitors and with no Repatriation costs it has a substantial benefit over the Canadian market place as well.

Table 3 – Impact of Taxation on Corporate profits

Corporate Profits (approximate)

 

 

 

 

 

 

 

Ireland

Isle of Man

Gibraltar

Canada

 

 

 

 

 

 

 

Profits

$5,000,000.00

 

$4,375,000.00

$5,000,000.00

$4,500,000.00

$3,900,000.00

 

 

Profits

$55,000,000.00

 

$48,125,000.00

$55,000,000.00

$49,500,000.00

$42,900,000.00

CONCLUSION

Opening a foreign-based subsidiary to process sales outside of North America can be very beneficial given that Quattroporte is looking at international trading. By establishing such a subsidiary, we will be able to circumvent withholding taxes on outgoing payments of dividends, interest and royalties. The routing of dividends through jurisdictions with favourable double tax treaties can help our organization avoid many such tax retentions.

The key issues we looked at were:

Zero to very low withholding taxes on dividends.

No taxes in the jurisdiction of the holding company.

Zero to very low withholding taxes on dividends (paid from holding company to shareholder).

Although not a crucial immediate issue we should also consider whether our company would be subject to any tax on a future disposal of the subsidiary, or whether there would be any tax on a disposal of the holding company shares. It will also need to be considered whether Canada has any special provisions that apply to dividends from tax haven jurisdictions given our intent to locate to such countries.

When identifying the most suitable location for opening a foreign-based subsidiary, we have found that the Isle of Man with its array of tax benefits, stable government, strong economy, and myriad of corporate and financial services will ultimately save our organization money, increase profits and streamline the operating costs of our business.