International Tax Case Study Assignment | Online Assignment
Your report should be based on your analysis of Sophia’s Dream Group, backed up by academic references to international tax law. Summarising laws and conventions without specifically applying them to the Group’s scenerio, as set out in the appendix, is not acceptable. Additionally, the assignment should be well presented and referenced showing a logical structure and good grammar and spelling. Demonstrate your ability to reflect analyse rather than describe the issues and produce a well- structured piece of works. Demonstrate your ability to draw a sound conclusions which is underpinned by your technical research. The learning outcomes being assessed: ILO 1 – Understand the principles of source and residence as they affect the jurisdiction of a country to tax individuals and corporations; ILO 2 – Analyse and criticise the principal tools available to individual governments to protect their tax base against cross border tax avoidance; ILO 4 – Formulate effective tax planning strategies for individuals and for multinational corporation
Sophia’s Dream Group Case Study
International Taxation, 2019/20
Sophia’s Dream Group (SDG) is the leading manufacturer and retailer in eco-fashion – sustainable and organic clothing. The clothes are currently available online and through luxury department stores in various countries.
SDG have developed a technique by which their clothing is manufactured through 3D printing, with the main ingredients for the raw printing material being tomato vines, tulips and deconstructed (up-cycled) natural fiber clothing.
The tomato vines and tulips are by-products of the crops and bulbs grown in Portugal, Greece and The Netherlands. They are initially processed (i.e. reduced to a paste) in seasonal, pop-up workshops within those countries. The pastes are then transported to a factory in Hungary where they are refined and blended with the deconstructed natural fibers to create the raw printing material suitable for 3D printing. The raw printing material (known as Sophia’s Dream Blends) is then sold and transported to the six retail centres on demand. The SDG supply chain is reflected in the diagram below.
The retail centres, owned by SDG, are where the clothing design pattern software and 3D printers that enable the production of the clothing are located. Customers can shop at the centres to purchase clothing which is produced by the 3D printers on demand.
SDG are now starting to place their 3D printers in a number of independent luxury stores in selected cities North America and Europe. SDG’s interactive holograms projected in the SDG retail centres and various independent department stores are proving to be very effective in marketing the SDG brand.
Prototypes of new clothing designs produced using SDG’s technology are developed and displayed at semi-annual fashion shows in New York, Los Angeles, Paris, and Milan. The orders for the software patterns for these new designs and the raw printing material placed by luxury retailers at these shows are substantial.
Clothing made to order is custom-fitted to each customer with the customer’s precise measurements being digitally determined and recorded though Sophia’s Dream Fit App. The App is available for use on a number of different types of mobile phones. Customers can record their measurements at home, and see what different models of clothes will look like in their size, before going to one of the retail centres, luxury stores, or ordering the clothes online. SDG does not charge customers to use the App, and does not restrict the downloads of the App, as it is considered to be another important marketing asset for the Group.
SDG are also able to market their custom clothes through targeted online advertising. Customers can buy custom clothing through the App from Virtually Sophia Kft. The orders are processed by the Hungarian-based sales team and created at the retail centre closest to the customer. Deliveries are then made through the fleet of electric (driverless) cars and drones leased by SDG from an unrelated Romanian Company.
Customer deliveries in this manner are expected to be a temporary solution as technological advances promise to bring SDG’s 3D printing technology into homes in the very near future. When that technological break-through occurs, SDG are poised to be leaders in fashion retail by selling directly into their customers’ homes. Customers will simply download the printing pattern for their chosen clothes, link their measurements from the App and press print!
A functional analysis of Sophia’s Dream Group is given as an appendix to this case
study.
Required:
SDG are becoming increasingly concerned about their image with respect to their corporate social responsibilities and their tax compliance. Their current international tax strategies have evolved over the years under the advice of their previous tax adviser. The SDG Board believe they have been far too aggressive and have hired your Firm for tax services. They have requested a critical assessment of the specific issues (below) with reasonable advice on how best to restructure their international tax affairs without appearing overly aggressive. They want to minimise their global tax obligation, but within the letter and spirit of national and international tax laws to avoid any adverse media attention. The SDG Brand as an innovative manufacturer and retailer in ecologically-sound and sustainable clothing must not be tainted by inappropriate tax strategies.
The area the Board would like you to consider:
- The placement and financial exploitation of the intellectual property: they are considering repatriating the IP to the UK, pre-Brexit;
Given the extensiveness of this work, you are one of several working groups established within your Firm to research and write up on a specific point.
Appendix: The Group’s Functional Analysis
| Company | Functions performed | Assets controlled | Risks borne |
| Sophia’s Dream SL
(registered and tax resident in Spain)
|
Shareholders: three siblings of the De Sousa Family own 55% of the stock (Maria (25%), Alberto (25%), and Teresa (5%)). The remaining 45% is owned by various individuals.
Holds 100% of the shares in Sophia’s Dream HQ SL.
Maintains the shareholder registers for SD-HQ SL and its subsidiaries and determines group dividend policy.
Determines the strategic direction and overall trading policies of the whole group.
Alberto De Sousa holds 25% of the shares in New Tech SC in Romania (see below). |
Shareholding of SD-HQ SL (and therefore all underlying subsidiaries)
50% key strategic staff
Unused group financing amounts
premises |
Loss of key staff
Rises in property taxes and rents
Brexit |
| SD-HQ SL (incorporated in Spain; physically moved to the UK in 2010; tax residence is to be considered periodically)
SD-HQ SL (continued)
|
Headquarters (HQ) – holds 100% of the shares in each of the Group’s first-tier subsidiaries with the exception of New Tech SC in Romania (see below); significant administrative functions for the Group; receives annual HQ fees and dividends from all subsidiaries.
SD-HQ SL houses the Research and Development (R&D) activities of the Group, and as such:
– Develops the core eco-fashion software which drives the 3D printers used to make clothes in retail centres for direct customer sales in various countries;
– Develops clothes design pattern software which is then produced using the 3D printers. Prototypes made from the software patterns are displayed at Fashion Shows in London, Paris, Milan, Madrid, Budapest and Berlin (the software is sublicensed to SD retail centres in various countries for production);
– Develops the knowhow for 3D Printers that are able to reproduce/manufacture Sophia’s Dream clothes (the printers are manufactured in SD FinTech Ltd, Austria);
– Develops the software for interactive holograms of fashion models that are displayed in luxury department stores and major city centres’ high streets, (the projectors are manufactured in SD FinTech Ltd, Austria);
– Develops Sophia’s Dream Fit app that takes precise customer measurements to ensure the perfect fit of every article of clothing.
There is a branch in Hungary with a small number of autonomous employees who develop customer databases and marketing tools, using sophisticated indexing software which has also been developed over the years by employees. Data and feedback from the use of holograms and information from Sophia’s Dream Fit App contribute to these databases. The branch employees are based in the offices of Virtually Sophia Kft.
The resulting intellectual property (i.e. patents, copyrights, knowhow brand, trademarks and various marketing databases and tools) are transferred to Sophia’s Dream Lux SARL (SD-Lux) as soon as the products are considered to be technologically viable. This is done by granting SD-Lux exclusive, indefinite leases on payment of upfront lump sums that more than cover the direct and indirect costs of the R&D, together an agreement by SD-Lux to pay nominal fixed royalty payments. Although ultimate ownership of SDG’s intellectual property is retained by Sophia’s Dream Company SA, the practical exploitation of the rights is transferred and managed in Luxembourg. |
50% key strategic staff
Eco-fashion development software and knowhow
Clothing design software development and knowhow
3D Printer development: hardware and knowhow
Hologram development: software and knowhow
Dream Fit App development; knowhow
Database development: software and knowhow Client base
Skilled workforce
Premises |
Obsolescence of technical knowhow
Emergence of competitors in eco-fashion provision market
Defection of skilled staff who might share their knowledge with competitors
Interest Rate Risk
Brexit
|
| Sophia’s Dream Lux SARL
(Luxembourg)
|
Company with IP exploitation functions.
It holds exclusive licences for SDG’s IP and, in turn, grants sub-licences over that IP to SDG’s retail centres, luxury stores and marketing teams. The sub-licenses permit the retail centres and luxury stores to make direct sales to customers in return for the payments of royalties to SD-Lux SARL. The value of royalties charged is substantial, which is reflective of the underlying value of the IP once it became viable.
The company also sub-licences certain IP on a manufacturing-only basis, being the IP relating to: – the blends, which is licensed to SDB Kft – the printer IP and hologram projector IP, which is licensed to SDFinTech A small group of highly experienced lawyers ensure the IP protection as well as oversight of basic registration and administration functions. |
Exclusive rights of the intellectual property
Staff: a small group of highly skilled lawyers |
Unsuccessful defence of copyrights and IP
Interest Rate Risk
Brexit |
| Sophia’s Dream Retail Centres:
SDRC-France SAS SDRC-Germany GmbH SDRC-Spain LLC SDRC-Italy Srl SDRC-Britain Ltd SDRC-Hungary kft
|
Retailer Centres of eco-fashion
– Coordinate the fashion shows within each country and provide after-sales support to customers in those countries;
– Spaces are rented; tend to be located in luxury shopping centres;
– House 3D printers used to produce clothing for retail (purchased from SD FinTech Ltd);
– Purchases the raw printing material for producing clothing from Sophia’s Dream Blend, Kft;
– Manages the distribution of clothing to online customers of Virtually Sophia Kft for processing and delivery costs and a nominal commission;
– Leases electric cars and drone for deliveries, exclusively for Sophia’s Dream products.
|
Sub-licenses for the technical soft/hardware
Basic technical knowhow to operate the printers and hologram projectors
A group of skilled staff
Electric cars and drones |
Rises in property taxes and rents
Loss of skilled workforce to competitors
Increases in the costs of the blends
Liability of operating driverless cars and drones
Brexit |
| New Tech SC
(Romania)
|
Manufacturing company to which SDG is its largest client, accounting for 80% of their net profits.
Alberto De Sousa owns 25% of the shares and the remaining 75% is owned by 1 cousin and 2 close friends from University.
The company manufactures and services electric vans, cars and drones for various clients, including SDG, on long-term leases. |
Vehicle/drone fleets
Insurance and maintenance contracts for vans, cars and drones
Skilled staff
Premises |
Claims of mechanical or operating problems with the vans cars and drones
Loss of skilled workforce to competitors
Rises in taxes |
| Dream Tech JV-SC
(Hungary)
|
New Tech SC has entered into a Joint Venture with Sophia’s Dream Blend Kft, forming a separate legal entity: Dream Tech JV SC, registered and effectively managed in Hungary. New Tech SC has a 60% interest in the JV, and SDB Kft has the remaining 40% interest.
The JV manufactures and maintains transportable workshops for exclusive use by SDG:
– Manufactures machines which are housed in trailers which are hitched to New Tech electric vans; – Sells the full transportable workshop (machines, trailers and vans) to Sophia Dream Blend Kft at what is proposed to be the FMV for this innovation. – Provides after-sales maintenance contracts to SDB Kft for a reasonable fee |
Contract with SDG to develop and manufacture transportable workshops | Mechanical problems with the movable workshops
|
| Sophia’s Dream Blend Kft
(Hungary) |
Manufacturing company which produces the raw printing material, Sophia’s Dream Blend, for use in the 3D Printers
Purchases transportable workshops from Dream Tech JV SC.
Deploys and operates workshops in Greece, Netherlands and Portugal: – traveling between farms in the 3 countries; – collecting by-products (tomato vines and tulips) for nominal fees to farmers, – processing by-products into pastes while on site, producing pastes
The pastes are then transported to the Hungarian Factory for further processing.
Refines and combines pastes with natural fibres from deconstructed (upcycled) clothing to create the raw printing material, Sophia’s Dream Blend, for use in the 3D Printers.
Purchases the natural fibres used in the raw printing material from third parties (charities and other sources for second hand clothing).
Sells the blends to Sophia’s Dream Retail Centres on demand. |
Factory and land
Mobile processing units (workshops)
long term supply contracts with farms for raw materials |
Weather and similar risks to crops – lack of availability of raw material
Mechanical problems with the movable workshops
Increases in the costs of the blends Shortages of blend on demand
Loss of skilled workforce to competitors
Rises in property and corporate taxes in Hungary
Brexit
|
| Virtually Sophia Kft
(Hungary)
|
Employs 30 sales and marketing experts to:
– maintain and develop the online presence of SDG; – receive/fill orders through the online site; – Liaise with retail centres that fill online orders by processing and delivering to geo-specific customers.
The server used by VS Kft for the SDG online presence is leased from an external provider in Lithuania.
Offices provided to SD-HQ SL employees that develop customer data bases and marketing tools.
|
Highly trained staff, premises
Leased server |
Staff being poached
Destruction or disturbance of the online provision.
Brexit |
| Sophia’s Dream FinTech Ltd
(Austria)
Sophia’s Dream FinTech Ltd (Austria) – continued
|
Provides centralised finance and technology co-ordination for SDG
Financing Division (25 employees): – Borrows in bulk from external banks (no other companies within the Group have any external borrowings); – Makes finance available to the operating companies, sometimes in the form of cumulative, redeemable, fixed-rate preference shares; – Deals with SDG’s foreign currency requirements. The interest rates charged by Sophia’s Dream FinTech Ltd to other group companies are at open market rates. Technology Division (25 employees): – Provides 24/7 IT support to SDG; – Manufactures hologram projectors to specifications developed by SD-HQ SL – Supplies and maintains hologram projectors in luxury stores and provides after-sales support services to the stores; – Provides support services for hologram projectors in SDG retail centres; – Manufactures 3D printers to specifications developed by SD-HQ SL – Supplies and maintains printers in luxury stores and provides after-sales support services to the stores; – Provides maintenance services for printers in SDG retail centres; – Maintains Sophia’s Dream Fit App; – Collects data from interactive holograms and SD Fit App and transfers data to SD-HQ SL branch in Hungary
Sells projectors and printers to external stores, but provides these free of charge to SDG’s retail centres. Charges technical service fees from luxury stores, retails centres, and SD-HQ SL for the above technical services.
Sophia’s Dream FinTech Ltd was granted a tax ruling by the Austrian Government in 2011 which provides that corporation tax payable by the Company in Austria will be at an effective rate of 1% of profits before taxation each year until 2021.
|
Cash balances
Loans outstanding and preference shares from other Subsidiaries in the Group
Technical services for maintenance of the printers
Technical services for maintenance of the hologram projectors
Skilled staff
Premises |
Interest rate risk,
Currency risk (both these are usually hedged)
Liability if printers are not promptly fixed
Challenge over the favourable tax arrangement Rises in property and corporate taxes in Austria
Loss of skilled workforce to competitors
Brexit |
| Sophia’s Server UAB
|
Dormant Subsidiary that once owned the SDG server; now a server is leased from an external provider. | none | none |
