6 %, 8 %, 10 %, 10 %, B u s i n e s s F i n a n c e

I’m working on a accounting report and need an explanation and answer to help me learn.

First,  please complete the homework problems found below. These will help you  to apply the concepts you have learned from the readings. They require  you to think critically about hypothetical situations to determine how  to handle the given problem for tax purposes.

Assignment 1: Problems

1. Maxco,  a foreign corporation, owns 100% of Sheetco, a domestic corporation.  Maxco manufactures a wide variety of sheets for worldwide distribution.  Sheetco imports Maxco’s finished goods for resale in the United States.  Sheetco’s average financial results for the last 3 years are as follows:

Sales……………………………………………… $20 million

Cost of goods sold……………………………. (15 million)

Operating expenses…………………………… (4 million)

Operating profit…………………………………. $ 1 million

Sheetco’s  CFO has decided to use the comparable profits method to assess  Sheetco’s exposure to an IRS transfer pricing adjustment by testing the  reasonableness of Sheetco’s reported operating profit of $1 million. An  analysis of five comparable uncontrolled U.S. distributors indicates  that the ratio of operating profits to sales is the most appropriate  profitability measure. After adjustments have been made to account for  material differences between Sheetco and the uncontrolled distributors,  the average ratio of operating profit to sales for each uncontrolled  distributor is as follows: 6%, 8%, 10%, 10%, and 14%.

Using this  information regarding comparable uncontrolled U.S. distributors, apply  the comparable profits method to assess the reasonableness of Sheetco’s  reported profits. In addition, if an adjustment to Sheetco’s reported  profits is required, compute the amount of that adjustment.

1. FORco,  a foreign corporation incorporated in foreign country F, manufactures  and sells figure skates. FORco owns a U.S. C corporation (“USSub”) that  distributes only FORco’s figure skates. USSub uses the comparable  profits method to show the arm’s length nature of its transfer pricing.  USSub can choose comparable companies from the following list of  potentially comparable companies.

   All Berry Ratios are an average of gross profit over operating expense for the last 3 years.

   • Shelter Inc.: A distributor of camping tents. Berry Ratio = 2.00.
   • Cash  Cow Inc.: A distributor of electronic knives. The company’s sales are  split 50-50 between the United States and India. Berry Ratio = 1.50.
   • Disk Inc.: A distributor of computer equipment manufactured by its Hong Kong affiliate. Berry Ratio = 1.20.
   • Floss  Inc.: A distributor of dental care products. Floss has a contractor use  Floss’s proprietary manufacturing process to manufacture all the  products Floss distributes. The contractor affixes the valuable Floss  tradename to all the products it manufactures. Floss retains the right  to all intellectual property. Berry Ratio = 1.10.
   • Acme Inc.: A sporting goods distributor. Berry Ratio = 1.05.
   • Mountain Top Inc.: A distributor of hiking gear. Berry Ratio = 1.15.
   • Juice Inc.: A distributor of juicers. Berry Ratio = 1.20.
   • Canine Inc.: A distributor of pet toys. Berry Ratio = 1.00.

What is the arm’s length range? Why?

1. Chairco,  a domestic corporation, produces a line of low-cost bar stools at its  facilities in Missouri for sale throughout the United States. During the  current year, Chairco’s management has decided to begin selling its bar  stools overseas and has begun exploring the idea of establishing branch  sales offices in some key countries in Europe and Asia. If possible,  Chairco’s management would like to avoid establishing a taxable presence  in these countries.

   Chairco’s management has asked you to  advise them on the types of marketing activities they can conduct within  these countries without creating a taxable nexus. For purposes of this  analysis, assume that the United States has entered into an income tax  treaty with the countries in question that is identical to the United  States Model Income Tax Convention of 2016.

2. US-Cco is a United  States C Corporation that is wholly owned by FRGNco, a company  incorporated in country F, which has a tax treaty with the United States  similar to the United States Model Treaty. FRGNco is privately owned by  six unrelated residents of Canada. FRGNco manufactures widgets and  earns $500,000 of income, all from the sale of those widgets to US-Cco.  US-Cco owns valuable marketing intangibles, which make its resale of the  widgets extremely profitable. During the current year, US-Cco earns  income of $10 million that US-Cco distributes as a dividend to FRGNco.  After receiving the dividend, FRGNco pays $6 million of compensation  (which is reasonable, ordinary, and necessary) to one of the Canadian  individuals, who acts as FRGNco’s CEO and is the brains behind the  operations. What is the rate of the withholding tax on the dividend?  Why?
3. SafeCo, a country Z corporation, has sales subsidiaries  throughout Europe and Asia. SafeCo sells in the United States through  its employee, Tom Johnson, who works out of his home but meets with  sales prospects daily. Pre-tax income attributable to Tom’s sales  constitute $1 million.
   1. Does SafeCo have a U.S. trade or business? Why or why not?
   2. If  country Z has a treaty with the United States similar to the Model  Treaty, would SafeCo have a permanent establishment in the United  States? Why or why not?