A tax haven is a state that has no payment of taxes be it personal or corporate. Businesses are allowed to operate without the intervention of the government in form of taxes (Shaxson, 2011). One of these states is the Liberia which allows the residents to carry out business or activities without the state interference. In this case, the petitioner may have used other alternatives, which from my own point of view include. Subsidiary companies were treated separately for tax matters. Therefore, no matter whether the companies belong to one entity but as long as they are registered separately then it means that they should be treated separately for tax purposes. In this case the company had treated the returns as if it was a single entity which was wrong and therefore this was a possible alternative that I believe the petitioner might have used.
Secondly, it is the responsibility of the resident company to hold the tax if it is dealing with non residents and remit the same to the authorities. The company is supposed to be responsible for all its tax matters to the respective authority. Three, undervaluing the iron ore is a trick normally used especially when the transaction is not at arm’s length and if it is a foreign subsidiary involved. The undervaluation means that the duty to be charged will be based on the value and therefore the country of origin loses the revenue.
Section 1.482-1(d) (3) of the regulations is more concerned on comparability. It states that:
“The comparability factors listed in section1.482–1(d) (1) are discussed in this section. Each of these factors must be considered in determining the degree of comparability between transactions or taxpayers and the extent to which comparability adjustments may be necessary. In addition, in certain cases involving special circumstances the rules under paragraph (d) (4), of this section must be considered” (Open Jurist, 1980).
I could interpret the statement to mean that it matters less whether the parties are related or not, so long as the transaction between them are not independent. Since, it will be treated as if the transactions were from parties who are treated not to be at arm’s length. Therefore, if there was any undervaluing, the authority will reserve the right to revalue the commodities and tax accordingly.
This raises problems because there may be lack of an official clarification or the parties involved may deny to be related, but the dealings between them may indicate that they are not independent. The law will always take the action so long as it is deemed fair and just. They may also do so if it is in the best interests of the public.
In addition, it is well known that some businessmen like to take advantage of the loopholes in the legal system for them to avoid taxes that is why I feel this statement was stated as such.
Some subsections of the section 1.482-1(d) (3) may receive more attention leading to more citations. These subsections are as discussed below;
This puts into consideration the resources that a taxpayer uses and degree of comparability between transactions. It compares the economic significance of the transactions undertaken and also the assets to be used like machinery and other intangible assets. This analysis brings forth factors which require to be accounted for while comparing two transactions, for instance, Research and Development, Product fabrication, Manufacturing, production and process engineering, extraction, and assembly, Transportation and warehousing (Open Jurist, 1980). These factors are mostly considered when determining the nature of the transaction and therefore make it easy to compare for purposes of taxation (VAT) which is imposed every time a product is added value (Open Jurist, 1980).
A contract can be written or unwritten. In case of a written agreement, it is essential to show how the goods will change title so as to be certain at the point of sale when the tax is imposed. This is normally cited mostly to show who has the obligation to pay taxes and how much based on the value transferred by the transaction in question. The authorities might disregard this written agreement if it is framed in a manner intended to underpay and base its argument on the prevailing market situation at that particular time (Open Jurist, 1980).
Conversely, in accordance with section 1.482-4(f)(3) the authority may decide the obligation upon the taxpayer basing on the economic situations if there is no written agreement. The legal rights of the taxpayers will be given more weight when determining the economic substance of the transaction in question (Open Jurist, 1980). For instance, the taxpayer or business person is deemed to be paid after the goods have been received by the customer since that is when a person conducts business at full capacity and sells then the authorities will deem it as a sales contract and impose tax obligation as necessary (Open Jurist, 1980).
In addition, an exporter may opt to distribute goods through established channels of subsidiary companies the transportation services offered by the subsidiary to parent company represent 10% of total sales (Open Jurist, 1980). In determining the degree of comparability the authority will take into account the difference in volumes of the different transactions and the frequency with which the transactions are undertaken (Open Jurist, 1980). In case of big change in the prices charged then the transactions cannot be used in determination of whether the transaction is at arm’s length or not.
Similarly, assume that Company A manufactures a product say Y and sells the same to the parent company. It also sells product Y to other taxpayers at a price of $100 per unit. Company A’s transactions are carried out under similar circumstances like economic as well as under similar terms and conditions. The subsidiary normally gives the parent 5% and 7% as discount for orders made in bunch of 30 and 100 units respectively. Take for instance, the parent acquires 70 units in a single order and that the subsidiary has no reliable information, this may imply that the price charged to the parent is on a prorate basis.
Also a manufacturer in a Country K, manufactures computers that it sells to the Parent in another country. The Parent puts the computers into various categories and sells the same to customers at arm’s length in its country. The parent is invoiced at domestic currency implying that the currency risks are included in the price to take care of any fluctuation in the currency before the goods are paid for. If the Subsidiary is in a financial position which can enable it to bear the risk, the authority will agree with the parent to allocate the exchange risk. Therefore, the district director has power to “disregard the contractual arrangement regarding product liability costs between FP and USSub, and treats the risk as having been assumed by USSub” (Open Jurist, 1980).
These are entities which present themselves as what they are not, for example pretending that they are making losses and therefore not in a position to pay tax. The case of “Hospital Corporation of America v. Commissioner was ruled subsequent to Humana” and involved similar facts and analysis (Capital Management Consulting (LLC), 2009). The US Tax Court held that “payments made by a subsidiary corporation to a captive insurance company, which was also a subsidiary of the parent, were deductible as insurance” (Capital Management Consulting (LLC), 2009).
The Court sought to determine whether there was bona fide transaction and based on Humana case, the court determined that “the captive insurance company was fully capitalized, provided insurance to the operating subsidiaries, and was formed for a legitimate business purpose” (Capital Management Consulting (LLC), 2009). It was notable to the court that the “captive was formed in a domestic jurisdiction, and concluded that the transaction was a valid insurance contract” (Capital Management Consulting (LLC), 2009).
As evidenced above, the other entities charged in this case were HCA’s subsidiary and the captive insurance company which was also owned by the HCA. Risk distribution was accepted by the IRS since there were other subsidiaries (over 100) which were insured by the captive insurance company (Capital Management Consulting (LLC), 2009). Under the Humana case, the court then addressed whether there was risk shifting and found that under analysis of statement of financial position and net worth adopted in this case by Sixth Circuit Court of Appeals, the two subsidiaries shifted the insurance risks to Captive, apart from employees’ compensation liability that was covered by indemnification agreement involving Ideal Mutual and HCA (Capital Management Consulting (LLC), 2009).
The contracts carried out by the entities were at arm’s length and therefore the companies had clean dealings between them and therefore they were not liable for any criminal case or avoidance of tax for that matter. The insurance was providing the services to other businesses and there is no indication of any type of special treatment to allies. This is therefore deemed to be just like a contract which could have been between the subsidiary and any other insurance company and therefore matters less whether the captive was owned by HCA or not.
It was within the business practices to take insurance cover to both the insurance and the workers. The cost was therefore an allowable expense as it was contracted to a legal insurance company. The owners of this matter were irrelevant and therefore the deduction was justifiable.
References
Capital Management Consulting (LLC). (2009). Case Law. Web.
Open Jurist. (1980). 617F.2d 942 – United States Steel Corporation v. Commissioner of Internal Revenue. Web.
Shaxson, N. (2011). The truth about tax havens. The Guardian. Web.