Following Bazwoods Foods Plc’s interest in relocating its meat processing subsidiary abroad in Ireland, Hungary, or Poland as a result of its high taxes in Germany, this paper is aimed at considering the different tax implications of its decision in the different countries. Firstly, it is considering the relocation of its meat processing facility in either of the aforementioned countries; the first part of the report is aimed at choosing the best location from a tax standpoint. The issues that will be considered here will be effective corporate tax rates in each of these countries and the incentives offered for foreign direct investment.
We will also consider elements of transfer pricing, EU directives, transfer pricing, branch profits, withholding taxes and double taxation relief. The second part of the report will consider some issues raised by one of its agents in Poland who feels that despite rudimentary transfer pricing rules in Poland, there are some important tax incentives to consider. Part three of the report considers whether there could be any tax incentives or advantages for operating the finance function from abroad.
Part four looks at the most suitable location for operating such a finance company. Part five considers from a tax viewpoint the company’s decision to either operate a branch or a wholly owned subsidiary in India. 1. Relocating the Meat Processing Facility. To decide on the best country for relocating the meat processing facility, I decided to carry out an analysis of the tax incentives and disadvantages for foreign direct investment in each of the three countries under consideration. I now present an analysis of each of the countries in turn. 1. 1 Poland.
Poland is an emerging Market and like any emerging market it exhibits most of the characteristics of an emerging market, which include the high demand for capital and technologies . According to Ziomek, some of the incentives provided by the government for FDI over the last 15years included the following: ? Full profit and dividend repatriation (after tax) ? In-kind contributions to foreign-owned equity capital in the form of fixed assets are free of customs duty; ? Funds from the liquidation of a company or from the sale of stock or shares may be repatriated;
Double taxation agreements between Poland and many other countries; ? Certain additional guarantees and incentives which can be obtained through negotiation, ranging from real estate tax relief, local taxes and charges relief. In Poland dividends are treated as non-deductible expenses for tax purposes for the payer. In the absence of authority to the contrary, a withholding tax of 20% must be deducted by the payer from gross dividend. The tax may be reduced, dividends may be exempt from the tax, or a tax credit may be granted under the provisions of a relevant tax treaty.
Further polish taxes are not payable by the recipient foreign company. (http://e-fpo. fpo. go. th/e-fiscal/PWGuides/individualguides/DOCS/wcd0000d/wcd00d2b. htm) The United Kingdom and Poland on July 20th 2006, signed a new double taxation treaty as a result of many Polish citizens taking up employment in the United Kingdom. (Polskim, 2006). The treaty which covers mostly income tax remitted by Polish citizens working in the United Kingdom is aimed at avoiding double taxation in Poland.
This treaty however, neither covers income tax, corporation tax, capital gains tax as well as income tax on income by UK citizens in Poland. (Polskim, 2006). The new treaty also applies to both income and capital. (Fiszer, 2007). It reduces taxes to 5% of dividends, if the beneficial owner of the dividends is a company which is a resident of the other contracting state and holds at least 10% of the capital of the company paying the dividends on the ex-dividend date and has done so, or will have done so, for an uninterrupted 24-month period in which the date falls.
In all other cases, the tax stands at 10% on dividends. (Fiszer, 2007). The 20th July agreement establishes a 5% withholding tax levied at the source on cross-border interest payments, except for interest payable on bank loans, payments for equipment leasing and payments made to, or guaranteed by, governmental bodies, which interest will be fully exempt from withholding tax. The 1976 treaty provided for taxation of interest only in the country of residence of the interest recipient, and no withholding tax at the source. (Fiszer, 2007). 1. 2 Ireland
Ireland has shown a consistently favourable attitude towards foreign direct investment since the 1960s. (Walsh, ND). According to Walsh, firms are motivated to choose Ireland because of the low rate of corporation tax and liberal grants for fixed assets and training. Ireland has the lowest rates of CT in the EU. See figures 9 and 10 retrieved from the article by Walsh (ND). According to OECD (1994), there are no restrictions of a general nature governing overseas investment in Ireland; no limits in the percentage of foreign ownership permitted and profits can be freely repatriated.
In addition, there are no restrictions to foreigners as concerns share ownership in Irish companies. (OECD, 1994). Foreigners are free to purchase land for industrial purposes without impediments. (OECD, 1994). Aid in the form of grants is given for all suitable projects to foreigners on the same basis as for Irish citizens. (OECD, 1994). Ireland had comprehensive double taxation agreements in force with 45 countries as of 2006. (Irish Taxation Institute).
The agreements generally cover income tax, corporation tax and capital gains tax (Irish Taxation Institute). In particular it has a double taxation treaty with the United Kingdom for the avoidance of double taxation and fiscal evasion. (Irish Taxation Institute). The taxes covered by this convention in Ireland include income tax, corporation profits tax, corporation tax and capital gains tax while in the United Kingdom the taxes include income tax, corporation tax, petroleum revenue tax and capital gains tax. (Irish Taxation Institute).
Although Ireland has a double tax treaty with the UK, the latter’s Treasury announced in 2002 that it was proposing to classify Ireland as a ‘tax haven’, and would in future apply its 30% corporation tax rate to the profits of Irish subsidiaries of UK companies. The Irish Department of Finance later announced that UK companies with subsidiaries based in the Republic were considering launching a legal challenge to the change, which had been brought on by the reduction of Ireland’s corporation tax rate to an eventual 12. 5%. The situation remains unclear.