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1. International Taxation Law 1
International Taxation Law
IDENTIFICATION OF THE INTERNATIONAL TAX ISSUES IN THE CASE
STUDY
Sakaran plc being a multinational group of companies looks forward to set up a
manufacturing plant through Sakaran Jersey Inc which has an intellectual property right. A
new modern factory building is to be build for the housing of the new plant. Sakaran plc
estimates to use £6 million to build the new factory that is required and it also estimates to
use £20 million to purchase the machinery and the plant that will be installed.
A decision is to be made by the company whether to set the plant as a subsidiary
branch of the Sakaran UK Ltd or the new plan is to be owned a 100% by a subsidiary of
Sakaran plc. Both decisions will have different taxing systems. In case of a new subsidiary,
there is an assumption that the manufacturing plant will be taxed as a resident outside the
UK.
A workforce is to be recruited for the new plant and Sakaran plc estimates the
workforce to be of 500 people. The workforce is large and so there is a requirement of
locations with plenty supply of skilled labour and inexpensive labour. This means that the
taxation rate for the income will be one of the determinant factors for Sakaran plc. Apart
from the workforce that is to be recruited, Sakaran plc will employ from UK a group of
production experts and managers for a period of not less than six months and not more that
five years.

2. International Taxation Law 2
THE CORPORATION TAX REGIME IN AUSTRALIA
The headline rates of tax
Compared to other countries, Australia has a low tax burden which combines both the
current situation and historical records. Based on the headline rates, among the OECD 30
countries in 2003 Australia had a tax burden which was the eighth lowest. The record of the
low tax burden was there in Australia since 1965 when it was the third lowest.
The unweighted average of GDP of the OECD 30 countries is 36.3 percent as a
proportion of the tax burden, and Australia has had a proportion GDP of 31.6 which is below
the average GDP. Its tax burden as a proportion of the GDP is above the weighted average of
the OECD countries which is 30.9 percent.
The tax mix of Australia is consistent with other countries apart from a few
distinguishing features. Australia raises 60.9 percent of its taxation revenue after imposing
levies on payrolls and incomes as direct taxation. The percentage is slightly lower that the
unweighted average in the OECD 30 countries which are 62.2 percent. The remaining part of
the taxation in Australia is received from other sources which are indirect and they include
customs and excise duty, services and goods tax and taxes for properties.
The company tax burden of Australia is higher and it is at 5.3 percent of the GDP
while compared with the unweighted average of the OECD countries which is 3.3 percent.
Concerning the sales tax and value added tax, the tax mix of Australia has a lower reliance
because the percentage is lower than the unweighted average.
In customs and excise, the tax that is raised is 3.4 percent which is the same as the
OECD average of the thirty countries. The country relies greatly on the taxes that are charged

3. International Taxation Law 3
on the immovable property. The state government refer to the transaction taxes as a
significant source of revenue.
Likely effective rate of tax in Australia
The foreign companies with income less than 10 million are charged an effective tax
rate of 41.2 percent. This means that Sakaran plc will be charged the effective tax rate of 42.3
percent which is basic corporation tax plus 2.5 surcharge tax if it will be set up as a branch of
the Sakaran UK ltd. This is because it will be treated like a foreign firm from UK which has a
subsidiary branch in Australia. If Sakaran plc decides to open the plan as a 100 percent new
subsidiary, then the effective rate of tax will change. This is because the effective rate for
firms that are domestic and have an income of less than 10 million is 30.9 percent. It means
that Saran plc as a 100 percent new subsidiary will pay a total of 33.9 percent of effective tax
which is inclusive of basic corporate tax which is 30 percent plus education cess on tax
surcharge which is 3 percent.
Ways in which corporations are taxed
Corporate firms in Australia are taxed at 30% which is a competitive rate when
compared to other countries and economies. Sakaran plc is likely to be taxed at the same rate
because it falls under the cooperate firms. The country has had a comprehensive review
which ensures that the tax rate in Australia is competitive. The review is aimed at reducing
tax complexity and to attract other countries to invest in it and have international skilled
labour.
To attract investors and to encourage innovation, withholding tax in Australia has
been reduced to 7.5 percent since July 2010 for the firms with foreign residents and the

4. International Taxation Law 4
country enjoys having the lowest withholding tax rate in the world. If Sakaran plc decides to
invest in Australia, it will enjoy the low rate percentage in withholding tax.
Concerning the general tax competitiveness, Australia was ranked in the fourth
position among ten countries and it was ahead of the United Kingdom and other countries. As
suggested by PricewaterhouseCoopers, (2009), the result was attained because of the tax
credit system that was put in place in 2010 and it was ranked by the KPMG’s Competitive
Alternatives.
A foreign company which has a branch in Australia is taxed based on the income
sourced from Australia and at the same time is attributable to the branch. The pricing rule that
apply in the transaction of the local branch and its head office that is foreign is the arms
length principle. Sakaran plc will not pay the branch profit tax because in Australia the profit
is not imposed.
If the branch is opened in Australia, it will benefit and enjoy from some of the tax
treaty provisions but the tax treaties in Australia allow full taxing of the resident company to
the source company if it has a permanent establishment in Australia. To determine the taxable
income of the branch, the treaty will apply the arms length principle. The OECD treaty
principles are the ones that are followed by the Australian treaties.
Tax relief for capital investment
In the case of Sakaran plc, capital investment includes the cost of building the new
factory, buying the machinery and the plant together with the installation cost. According to
Fox, (2002, pp. 103 -120), the plant that will be bought by the Sakaran plc will be termed as a
capital investment and they will enjoy capital allowances for the building, machinery and the
plant. Capital allowances means that there will be tax relief for the capital items. This gives

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the firm the confidence to invest in the country. As illustrated by CCH Australia Limited and
Internal CCH editors and analysts, (2009, pp. 404 - 407), the workforce in Australia is
supposed to pay the income fee and the Medicare levy on self assessment under an employee
share scheme, there are tax free benefits if the scheme is non discriminatory of up to A$1,000
per annum for certain employees. The employees are supposed to pay payroll tax on share
benefit scheme and they are provided with basic tax reliefs. The employees in Australia and
the group that consist of managers from the United Kingdom that is to be employed by the
Sakaran plc is to benefit from the Australians international social security agreement that
covers employees within the agreement countries. The social insurance scheme helps the
people who have lived in an agreement country or in Australia and they are covered by the
social insurance scheme.
Transfer pricing regime
The existing revenue base of Australia is being eroded by the taxpayers because of
their profits being sent offshow. There are increasing prices on the transfer pricing and it is
becoming hard to establish competitive advantage for international manufacturing businesses.
The cost of the associated tax is neglected by the manufacturers who use strategies of cost
reduction. As stated by Transfer pricing, (2010, pp. 1-371), Transfer pricing have been a
priority issue in Australia for many years and the country has a good reputation
internationally for the transfer pricing regime.
Outline of the main reliefs affordable by Australia and UK
1. The profit that is realised from an industrial enterprise in Australia or in UK will
only be taxed in one country unless there is a permanent establishment attributable
to it.

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2. Individual residents who are employees are exempted from tax in either Australia
or UK on professional or personal services that are performed on behalf of
residents in the country. The individuals are to be taxed on their country.
3. Dividends that are earned by the resident may be taxed in the other country if they
were paid by a resident company for tax purposes. If the dividends beneficiary is
owned by a person who is a resident of the other company he may be taxed in that
company. The dividends may also be taxed in the country where the company that
is paying the dividend belongs.
4. Interest that is earned by a resident in a country will be exempted from tax in the
other country on behalf of the resident but they are to be taxed in the country
where the interest is earned. The interest that arises in a country and is beneficiary
owned by a person who is a resident of another country is taxed in the other
country.
5. Royalties that is earned and is attributable to the resident of either country are
taxed by one country and not both countries. In case of the royalties that arise in a
country and is beneficiary owned by a resident of another country it is to be taxed
in the other country.
6. The treaty between Australia and United Kingdom states that if a firm or a
company is a dual resident and there is a double taxation Agreement that is
between UK and another country which has a tie breaker and under the tie breaker
the resident is awarded to Australia, then the company is called a treaty non
resident. For the companies that are treaty non resident after 1993, they cease to
be the residents and the taxation manual that is used is CTM34100. The company
is required to fulfil the provision of giving a notice in the case of migration.

7. International Taxation Law 7
7. In Australia, the profits of an enterprise that has a tax treaty cannot be taxed. The
tax profit can only be taxed if its business is carried out in Australia through a
permanent establishment and Article 7 that deals with Australia’s tax treaties is
used as illustrated by OECD, (2003, pp. 1-28). A permanent establishment arises
if an Australian resident does business in a foreign country or a person who is non
resident carries on a business in Australia.
8. The managers of Sarakan plc who will come from UK to work in Australia will be
regarded as residents of Australia as long as they work in Australia regardless of
the time they work. Their income will be termed as coming from UK and their
income will be taxed in Australia and not in UK using the first category of
taxation in UK. As stated by HMSO, (2003, p 1-48), the wages, salaries and
remunerations that is earned by a resident as a result of employment will be taxed
in the country where it is earned.
As Ronald, (2003, pp 725-753), argues, before making of the treaty, the
administrative procedures that are to be followed require that for a foreign subsidiary to be
allowed to pay dividends there are a few conditions to be met. One of the conditions concerns
the incoming dividends. The incoming divided must be subject to a low withholding tax or it
may be exempted from withholding tax. The dividends income received from a subsidiary
may be subject to low corporate income tax or it may be exempted. This makes it simple for
the countries that want to invest in Australia because the conditions are simple.

8. International Taxation Law 8
References
CCH Australia Limited and Internal CCH editors and analysts, (2009), Australian Master Tax
Guide, 44th edition, Wolters Kluwer business, Australia
Fox, K, J., (2002), Efficiency in the Public sector, Kluwer Academic Publisher, Norwell,
Massachusetts
HMSO, (2003), UK/ Australia Double Taxation Convention, Crown Copyright Policy
Guidance, Australia
OECD, (2003) Articles of the model convention with respect to taxes on income and on
capital, (Online) Available from <http://www.oecd.org/dataoecd/52/34/1914467.pdf >
Viewed on 21 May 2011
PricewaterhouseCoopers, (2009), Corporate Tax Rates, (Online) Available from
<http://www.business.nsw.gov.au/invest-in-nsw/about-nsw/economic-and-
business-climate/corporate-tax-rates > Viewed on 21 May 2011
Ronald, D., (2003), The Oecd Model Tax Treaty: Tax Competition And Two-Way Capital
Flows. Blackwell publishing,
Transfer pricing, (2010), Transfer Pricing Guidelines for Multinational Enterprises and Tax
Administrations, Centre for tax policy and administration