UNIVERSITY OF SYDNEY

FACULTY OF LAW

MASTER OF LAWS

MASTER OF TAXATION

MASTER OF INTERNATIONAL TAXATION

GRADUATE DIPLOMA IN TAXATION

EXAMINATION IN COMPARATIVE INTERNATIONAL TAXATION

TWO HOURS

17 November 1999

INSTRUCTIONS:

1. Reading time allowed is 15 minutes.

2. This is an OPEN book examination. Candidates may take any books and materials whatsoever into the examination room.

3. Candidates must answer THREE questions.

4. The examination is worth 70% of the marks for the course. Each question is of equal value and, where a question has parts, each part is of equal value.

5. In each answer, state any further information (if any) that you may need to fully answer the question. Where necessary, state any assumptions that you have made in answering a question.

6. The Republic of Fiscalia, the Kingdom of Utopia, the Equitable Republic and Republica are to be treated as separate countries.

This examination consists of 4 pages, including this cover page. Please be sure that your examination paper is complete.

QUESTION ONE

Expatriate is a tax resident of the Kingdom of Utopia where she currently lives and works. She is an in-house tax counsel with Multinational Inc which has offered her a posting in the Republic of Fiscalia. The term of the assignment is one year with an option of a further two years if both parties agree. Both Expatriate and Multinational contribute to an employer-based retirement fund for the benefit of Expatriate. Expatriate also holds options to acquire shares in Multinational which may be exercised at any time over the next three years. If Expatriate takes the posting, then she will be entitled to a base salary plus a range of benefits including free housing, a car and annual home leave (all fares paid for) to Utopia. Expatriate holds a portfolio of shares as an investment. It is expected that she will rent out her home while in Fiscalia.

Advise Expatriate on the income tax issues that she will need to consider in relation to the posting. Assume that employee benefits are taxable to the employee in Utopia and to the employer in Fiscalia (under a fringe benefits tax). What if the tax laws on this issue are reversed?

QUESTION TWO (ANSWER TWO PARTS ONLY)

1. Microsoap Inc is a fiscal resident of the Equitable Republic. It develops and supplies financial accounting software customised to the needs of its clients. All work is performed by Microsoap’s employees in the Equitable Republic. The software is delivered to the customer through the internet. Microsoap’s customers include enterprises in Republica. Both the Equitable Republic and Republica impose VAT (i.e., GST). Most of Microsoap’s customers in Republica are registered for VAT, although some are not registered as their turnover is below the registration threshold or they make only exempt supplies (i.e., they are input taxed). Of those that are registered, some principally make exempt supplies (such as financial institutions).

Advise Microsoap on the possible VAT implications of its supplies of software to customers in the Equitable Republic.

2. The Government of the Republic of Fiscalia, a developing country, is considering offering a 5 year tax holiday to attract new foreign investment in manufacturing.

Advise the Government of Fiscalia on the matters that it will need to take into account in determining whether to offer the tax holiday incentive.

3. In Year 1, Partnership P earns profits. In Year 2, P distributes partner A’s share of the Year 1 profits. Republica (where P was created) treats P as a company; it taxes P on the profits in Year 1, and imposes a withholding tax on the distribution of profits to A in Year 2. The Equitable Republic (the residence state of A) treats P as fiscally transparent; it taxes A in Year 1 on A’s share of P’s profits, and recognises no taxable event in Year 2. What are the tax issues arising from the above facts? What if the tax laws of Republica and the Equitable Republic are reversed?

QUESTION THREE (ANSWER ONE PART ONLY)

1. What is the purpose of controlled foreign companies rules? Outline the main design features of such rules and explain how those features relate to achieving the purpose of the rules.

2. The Equitable Republic currently taxes only on a territorial basis. The Government has decided to tax residents on worldwide income, but is unsure as to the appropriate form of relief to prevent international double taxation. Advise the Government on the options for providing such relief. In your answer, outline the main design features of each method of relief.

QUESTION FOUR

Software House Inc is a fiscal resident of Republica. It distributes shelf software (shrink wrap software) through advertisements in computer magazines circulating in the Kingdom of Utopia. The advertisement refers customers in Utopia to Software House’s web site. This is located on a server in Utopia. The server is owned and operated by an unrelated company, Computer Server Inc (a fiscal resident of Utopia). Software House pays a monthly fee for space on the server. Software House has no business premises or employees in Utopia.

The web site contains detailed descriptions of the software products available. If customers want assistance in selecting the right software, then they can correspond through the web site with a sales assistant in Republica. Once a customer has decided to purchase a particular software product, the customer clicks on the "order" icon on the web site. Customers pay for the software by providing their credit card details. Depending on the software, prices range from $100-$500. Once the customer’s credit card details are checked, Software House sends the customer an e-mail containing an order code that the customer can then use to download the software from the web site. At the start of the process of downloading the software, a message comes up on the screen explaining that the customer is being granted a licence to use the software subject to the condition that they do not make a copy of the software. If the customer agrees to this, then the customer clicks on the "continue" icon on the web site and the software is downloaded.

Advise Software House as to whether they may be taxable in Utopia on the supply of software products to residents of Utopia. Would it make any difference if the server was located on a laptop? What if after selecting the software, the customer is asked to click on an icon linking the customer to a payment web site of Software House located on a server in Republica?