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Data Migration Wizard |
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Data Exchange Wizard 3.4.4
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Visual Importer Enteprise Flash
Demos and Tutorials |
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Visual Importer Enteprise 7.5.11
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Active Business Activities |
Canadian companies undertake a large scope of business activities via foreign affiliates. Some of the types of activities are as follows:
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Acting as an international agent for export sales: This is perhaps the most common activity. The IBC can conduct a variety of business activities on behalf of the Canadian parent. These may include intake of purchase orders, invoicing, management of international agents, accounts receivable, international accounting, contracting of shipping and other logistics, insurance etc. The IBC would then take a fee for performing those services. This is often done as a percentage of sales, based on other third party comparables or other considerations that meet the transfer pricing rules. In these situations, the IBC does not take title to the goods and/or services, but acts only as a service agent.
- Onward Selling: In some instances the IBC will buy from the Canadian parent and then sell at a marked-up price to the international marketplace. Obviously, the mark-up must be reasonable and sustainable under transfer pricing rules. The profit for the IBC is the differential between the buying and selling prices. In these instances, the IBC takes title to the goods and must therefore be able to have financing capabilities.
- Trading Activities: In these cases, the goods/services are being purchased outside of Canada and sold outside of Canada. The IBC will therefore take title to the goods, and will be the direct contracting party with the ultimate buyer. They will assume all commercial risk associated with the transaction. In instances where the Canadian company is providing services in conjunction with the transaction (i.e. marketing), fair and reasonable compensation must be paid to the Canadian company.
- International Joint Ventures and Strategic Alliances: In many circumstances, there are advantages to having the international alliance structured between the foreign partner and the IBC as opposed to directly with the Canadian parent. This normally will give the company the option to maximize the profit potential for the IBC.
- Imports: In certain circumstances, the IBC can be used as an agent for the importation of goods into Canada. In order to do this, at least 90% of the goods imported must go to arm's-length parties. Provided that this is workable, then the same taxation consequences as with the export agency scenario will apply.
- Intellectual Property: Many companies are using the IBC as a vehicle to acquire, hold and license intellectual property. In general, it is preferable to get the intellectual property into the hands of the IBC at as early a stage as possible (for both valuation and capital gains purposes). From a capital gains perspective, this makes very good sense. Even from a licensing standpoint, many companies are finding it preferable to deal with the 6-employee requirement, given the tax savings from having licensing and royalty income flow through the IBC. One strategy that is being employed is to have the IBC fund the ongoing R&D relating to the intellectual property. This establishes the ownership of the IP at an early phase.
- Financing Options: It is possible to use the IBC as a financing vehicle for international transactions. Not only does this apply to the usual "buy-sell" scenarios, but also to those situations where investment in another country must be made. There are usually advantages to doing this via the IBC (for a variety of reasons, including the "double dip" option, and for reducing withholding tax in other jurisdictions). The ability to provide finance will assist both in establishing "substance" for the IBC, and also with respect to sheltering income on retained earnings.
- Risk Management/Insurance: In the international arena, there are often increased business risks than are faced domestically (this is particularly true when dealing with the very litigious US marketplace). International business structures are often used to minimize that risk (more on this later in this paper), as well as to fund exempt insurance vehicles to deal cost-effectively with management of that risk.
- International Investments: When a Canadian company is considering a direct investment in a third country, it makes abundant sense to also consider whether or not the investment should be made directly out of Canada, or via an IBC. Factor to be considered include risk management, tax treaties with the third country, the impact of withholding tax, the ability to charge management and other fees by the IBC to the third country company, and the need for finance in the new venture. While each case must be considered on its own merits, in many cases the best avenue to follow will be to use the IBC.
- E Commerce and Web Related Activities: As e commerce becomes more a reality in some form for most companies, the IBC usually takes on an expanded role in this area. Some companies have moved all server and internet activity to the IBC. It is important that the IBC management team either have in-house capability to conduct these activities, or that it is able to contract such technical items as maintenance to an outside service provider.
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