Abstract
Due to the structures of international taxation and accounting, Clover Machines is taking a look into whether a JV is the appropriate structure for their India branch. They want to know which organizational structure, subsidiary or joint venture (JV), will work the best for them, and they need to find a way to select the appropriate transfer prices. With a general understanding of how international taxation works, this paper will take a look at the different options available to Clover Machines for their overseas operations, and work to provide an appropriate solution for the company.
Keywords: Clover Machines, JV, subsidiary, joint venture, international taxation, taxes, accounting, transfer prices
Clover Machines: Minimizing Global Taxes
Due to the structures of international taxation and accounting, Clover Machines will need to take a look into whether their current joint venture (JV) setup is the appropriate structure for their India branch, or whether they should look into setting up a subsidiary in its stead. In addition, they will need to find a way to select the appropriate transfer prices.
Joint ventures, much like the current setup of Clover Machines with their partner corporation in India, serve as an agreement between two entities who wish to undertake a specific economic activity under joint control (Ready Ratios, 2013). They require unanimous consent for both parties in all forms of decision making, and work by having jointly controlled operations, assets, and entities (Ready Ratios, 2013). Subsidiaries, on the other hand, include the incorporation of one entity with another, with the parent company controlling the financial and operating policies of their controlled partner companies (subsidiaries), typically through the purchase of more than 50% of the shares of the subsidiary, giving the parent company a controlling interest (Ready Ratios, 2013).
Subsidiaries represent a long term commitment to a foreign country, and because of this long term commitment, the business’s reputation with that foreign company increases. They provide a tax advantage due to the fact that the home country tax will not be levied until the profits are repatriated to the home country though they do have a larger up front cost and require more working capital (Zeepedia, 2013). Joint ventures are considered to be the least risky option of the two, and are used as the primary method of gaining access into foreign markets (Zeepedia, 2013).
Given the various tax breaks that a subsidiary offers, it makes logical sense from a business standpoint to change from a joint venture structure to a subsidiary setup. The joint venture setup made the most sense initially, as it allowed for Clover Machines to get their foot in the door in the market in India, however, now that they are firmly entrenched, it makes sense to take things to the next level and setup a subsidiary instead, being able to use their same contacts, and possibly setup with the same company they are currently in a joint venture setup with. In addition, setting up the subsidiary will also serve to negate the issues that they are currently experiencing with taxation in their current business model.
Due to worldwide deficits experienced by multiple governments, many countries are attempting to lessen or negate those deficits by increasing the transfer pricing audits that are performed in order to increase current taxes and impose new ones (PWC, 2013). Sustainable transfer pricing in the international market may be difficult to attain at first due to the challenges presented by attempting to keep up to date with new and revised pricing regulations (PWC, 2013). Once Clover Machines has setup their new subsidiary, they have the option of going in and setting up an internal department that is designed specifically for managing financial services intercompany transactions, they will be able to stay on top of the game.
Through these simple changes, Clover Machines will be able to further reduce their taxation expenditures, instead of paying out a sum total of 200 million USD per year in taxes alone.
- Ready Ratios. (2013). Subsidiaries, joint ventures and associates. Retrieved from http://www.readyratios.com/reference/accounting/subsidiaries_joint_ventures_and_associates.html
- PWC. (2013). Clarifying the rules: Sustainable transfer pricing in the financial services sector. Retrieved from http://www.pwc.com/gx/en/tax/transfer-pricing/sustainable-transfer-pricing-in-the-financial-services-sector.jhtml
- PWC. (2013). Transfer pricing . Retrieved from http://www.pwc.com/gx/en/tax/transfer-pricing/index.jhtml
- Zepedia. (2013). Corporate finance. Retrieved from Ready Ratios. (2013). Subsidiaries, joint ventures and associates. Retrieved from http://www.readyratios.com/reference/accounting/subsidiaries_joint_ventures_and_associates.html
