Corporate Taxation

Corporate Taxation Final Exam Spring2020Cyberdyne Systems, Inc. (“Cyberdyne USA”) is a U.S. corporation based in Miami, Florida and operates in the technology sector. It is the parent company of the Cyderdyne Group, with significant operations throughout the U.S.In its quest for worldwide domination, the Cyberdyne Group will be embarking on a massive international expansion in the next year. It plans to open subsidiaries in Europe, Asia, Africa, and Oceania.For each region Cyberdyne USA has narrowed its choice of location for possible subsidiaries to two countries. The two countries for each region are as follows: Europe-Switzerland or the Netherlands Asia–South Korea or Japan Africa–Egypt or South Africa Oceania–Australia or New Zealand Cyberdyne USA’s primary product is the personal computer operating system T-101 (“T-101 O.S.”), which is the first O.S. to incorporate elements of artificial intelligence. Cyberdyne USA will license its T-101 O.S. patent to the four regional subsidiaries (“regional subsidiaries”) to be distributed in their respective regions. Cyberdyne USA will receive royalty payments equal to 3% of pre-tax income earned by the regional subsidiaries from the licensing of the T-101 O.S. to customers in their respective regions. In addition, each regional subsidiary will engage in an another line of business in an effort to diversify the Cyberdyne Group’s business. Cyberdyne’s European subsidiary will develop and sell a suite of productivity software, which will include a word processor program, a spreadsheet program, a presentation program, and a notetaking program. This suite of productivity software will be called Cyborg Office, and will be available for purchase separately from the T-101 O.S., though it does have some features which are tailored to the T-101 O.S.Cyborg Office will be sold, as opposed to licensed.Cyberdyne’s Asian subsidiary will develop and sell a new smartphone, called the Genisys Phone. The Genisys Phone will not use the T-101 O.S., as it only works on personal computers. Rather, the Genisys Phones will feature the world’s first mobile operating system which incorporates artificial intelligence, called the T-101M. The T-101M will be protected by patent obtained in the jurisdiction of Cyberdyne’s Asian subsidiary.T-101M is based in part of the T-101 O.S.Cyberdyne’s African subsidiary will develop an web browserand internet search engine. The internet explorer, called Skynet, will be already installed on the T-101 O.S. The search engine, www.salvation.net, will be accessible on the world wide web and will be the default home page on Skynet.

Cyberdyne’s Oceanic subsidiary will develop and sell a home video game console called the T-X. The T-X will not feature any artificial intelligence, but will boast top of the line graphics and video games developed by the most prominent developers.Cyberdyne has run financial models for each possible subsidiary, and has come up with the following figures. Some countries have tax incentives for technology ventures, which have been taken into consideration in the financial models, and listed below. You can assume that all the figures are in the functional currency of the Cyberdyne group, and there is no need to convert different currencies.All subsidiaries pay a 3% license fee for the use of intellectual property owned by Cyberdyne. In addition, all subsidiaries will pay out all of its profits as a dividend to Cyberdyne USAon an annual basis.Switzerland Revenue: 3,615NOTE: It is considered that 50% of revenue is derived from the T-101 O.S. patentR&D costs: 1,750Other deductible costs: 1,400Tax rate:12% on regular income, Special tax rate 9% on income derived from patents The Netherlands Revenue: 3,500NOTE: It is considered that 50% of revenue is derived from the T-101 O.S.patent R&D costs: 1,200Other deductible costs: 950Tax rate: 25%Special tax rate of 12.5% for income derived from patents South Korea Revenue: 3,050NOTE: It is considered that 50% of revenue is derived from the T-101 O.S. patent R&D costs: 1,100Other deductible costs: 875Tax rate: 25%South Korea allows for 25% of R&D costs to be applied as a tax credit Japan Revenue: 3,200NOTE: It is considered that 50% of revenue is derived from the T-101 O.S. patent R&D costs: 1,250Other deductible costs: 950Tax rate: 30%Japan allows for all R&D costs to be taken as a tax credit, but tax credits cannot exceed more than 30% of the tax liability

Egypt Revenue: 2,400NOTE: It is considered that 50% of revenue is derived from the T-101 O.S. patent R&D costs: 875Other deductible costs: 825Tax rate: 22.5%The first 500 of earnings is exempt from tax.South Africa Revenue: 2,725NOTE: It is considered that 50% of revenue is derived from the T-101 O.S. patent R&D costs: 950Other deductible costs: 865Tax rate: 28%The first 200 of earnings is exempt from tax.Australia Revenue: 2,975NOTE: It is considered that 50% of revenue is derived from the T-101 O.S. patentR&D costs: 1,015Other deductible costs: 980Tax rate: 30%The first 100 in R&D costs can be taken as a tax credit. Any excess R&D costs can be carried forward as tax credits for 15 years.New Zealand Revenue: 2,050NOTE: It is considered that 50% of revenue is derived from the T-101 O.S. patent R&D costs: 575Other deductible costs: 755Tax rate: 28%The first 200 in R&D costs can be taken as a tax credit. Any excess R&D costs can be deducted as a cost.GROUP PRESENTATION Cyberdyne has hired your firm to evaluate which country it should choose for each region, as well as analyze whether it will be able to take advantage of tax treaty benefits as applicable in the various countries. Your firm’s managing partner, Mr. Lionel Hutz, has done a preliminary analysis of the issues, and has asked you, the firm’s tax department, to prepare a presentation which answers the following questions.

1.For each region, which country should Cyberdyne choose? Provide sample calculations that justify your choice.For purposes of these calculations, you may assume that the subsidiaries may take advantage of treaty benefits as described in the relevant tax treaty with the U.S.2.In addition to the financial analysis, it has to be determined if Cyberdyne USA and the regional subsidiaries can satisfy the Limitation on Benefits article of each relevant tax treaty.Analyze whether the regional subsidiaries in Asia, Africa, and Oceania satisfy the Limitation on Benefits article. This analysis should include two separate parts which analyze(1) the dividends and royalties earned from the T-101 O.S. and (2) the dividends earned from each regional business activity. This presentation should be in PowerPoint (or any equivalent program) format, but apart from that, Mr. Lutz has left the format open to you and your fellow associates.

INDIVIDUAL ASSIGNMENT

Part I:In addition to the presentation, Mr. Hutz has an assignment for each associate. He would like you to draft a memorandum which analyzes whether the European regional businesses would satisfy the Limitation on Benefits article for each possible country.

In addition, the Cyberdyne Group is considering whether or not they should use a United Kingdom holding company for its European regional business.

How would the introduction ofa U.K. holding company affect the dividend and royalty payments made to Cyberdyne USA? Would the Cyberbyne Group satisfy the Limitation on Benefits/Principal Purpose Testarticles for the relevant treaties?

The U.K. holding company would have a legal, tax, and financial department that assiststhe four regional Cyberdyne subsidiaries.Your memo should be font Times New Roman, size 12, 1.5 spacing with standard indents in .rtf, .pdf., .doc, or .docx file format. You are free to structure the memo as is most convenient to you.

Part II:

For the second part of your individual assignment, you may choose one of two essay topics. Your essay should be no less than 300 words, font Times New Roman, size 12, 1.5 spacing with standard indents in .rtf, .pdf., .doc, or .docx file format. In terms of the document structure(introduction, analysis, conclusion, etc.), you are free to structure the analysis as is most convenient to you.

Essay topic A: There are two principal means by which countries prevent tax treaty abuse,the Limitation on Benefits clause and the Principal Purpose clause. In your opinion, which of the two is better? Why? Justify your answer with examples where possible.

Essay topic B:Choose or create a transaction of your choice which would be subject to transfer pricing rules. Perform an analysis of the economic circumstances of the transaction.