Page 21 - OCS Workbook - Day 2 Suggested Solutions (May 2018)

SUGGESTED SOLUTIONS

EXERCISE THREE (TAXATION)

To: Roberto Rossi (Finance Director)
From: Finance Officer
Subject: Re: Strictly confidential

I have put together some thoughts about the tax implications relating to the acquisition of the new
retail premises.

If Mansako purchases the retail development as a subsidiary.

The overseas retail store will remain as a separate legal entity and will be taxed under the Chinese tax
regime at 35%. However Mansako will be taxed on any dividends that it receives from the hotel
under Lowerland's tax regime at 20%. However, whilst this appears that the profits have been taxed
twice, Lowerland has double taxation treaties with a number of countries and therefore if one exists
with China then some of this tax could be claimed back. (See later explanation).

Loss relief would not be available to the group as the subsidiary is in a separate tax authority. So
losses in the subsidiary could not be used to reduce Mansako’s tax liability in Lowerland.

Tax depreciation on the purchase of assets would be based on the rules in China which may be very
different to the rules in Lowerland and any transfer of assets between Mansako and the subsidiary
may be subject to capital gains tax.

If Mansako only purchases the assets of the store.

In this situation the store would be treated as a branch and therefore all profits earned by the hotel
will be subject to Lowerland taxation at a rate of 20%.

Loss relief could be claimed so that if the store made a loss this could be offset against the profits of
the other stores thus reducing the overall tax liability.

Assets would be subject to tax depreciation under Lowerland’s tax rules on a 25% reducing balance
basis in line with all the other assets that Mansako owns.

It is worth pointing out at this stage that this is probably what Oakland has done in the article. It is
not that they are not paying tax, but it is that they are not paying tax in China as their stores are
merely branches and therefore are taxed under Lowerland tax rules.

Double taxation relief.

If a double taxation treaty exists between Lowerland and China and Mansako treated the acquisition
as a subsidiary then the dividends that Mansako received from the retail store would attract double
taxation relief in the following way.

Assuming that Mansako received a dividend of L$100,000 from the store in China then:

The dividend has already attracted tax at 35% in China so the underlying tax already paid would be
L$100,000/65x35 = L$53,846.

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