Quattroporte Inc. Essay Example

utilizes the Guernsey Pound as its official currency, which is directly linked to and holds equivalent value with the British Pound.

Guernsey, a small island in the Channel Islands, is situated between the United Kingdom and France. It has a population of around 66,000 (Guernsey, 2012). The island operates independently from both the European Union regional trading agreement and the UK, with its own laws and regulations. Notably, Guernsey is recognized as a tax haven where over half of its income is generated through banking, fund management, and insurance activities. Its economy relies heavily on corporate entities established as "off-shore" subsidiaries. Guernsey aims to diversify its sources of revenue by establishing itself as an Intellectual Property (IP) hub.

Quattroporte may find advantages in creating a subsidiary in Guernsey due to its favorable corporate tax rate of zero percent and strong copyright protection laws. Moreover, Guernsey presents other appealing factors such as a small population, high cost of living, distinctive two-tier housing system, and an exceptionally low unemployment rate of 0.9%. In order to attract talented professionals from local businesses, Quattroporte should ensure competitive salaries and benefits when establishing their subsidiary in Guernsey.

Guernsey, as a British protectorate, receives tax exemption from the United Kingdom and benefits from access to the UK Crown's national security, political stability, and advanced financial systems. According to Guernsey Finance, it is the preferred choice for non-UK entities listed on the London Stock Exchange (LSE) seeking incorporation. This makes Guernsey an important gateway for global capital access. Despite resistance to EU pressure in establishing a 10% corporate tax rate like EU members do, it should be noted that even if Guernsey did implement this

rate, it would still be more profitable for Quattroporte compared to Malta and Ireland.

Malta, situated in the Mediterranean Sea to the south of Italy, is a self-governing island nation that belongs to the European Union and employs the Euro as its official currency. The country's status as a tax shelter for businesses can be attributed to its favorable corporate taxation rates and a large workforce of 279,809 individuals who are proficient in multiple languages. Moreover, Malta possesses political stability, advanced telecommunications infrastructure, and an advanced banking system (EMD, 2011). To incentivize companies to establish operations within its borders, Malta offers tax rebates and maintains a low corporate tax rate of merely 4%.

Malta has a standard corporate tax rate of 35%, but if businesses establish themselves as trading companies in Malta, they can receive a refund of up to 6/7 of this rate. This effectively reduces the tax rate to 5%. Malta provides various programs to encourage foreign investment, such as tax holidays, export incentives, investment and accelerated depreciation allowances, reduced taxes on reinvested profits, grants for training costs and management services. Furthermore, Malta has favorable conditions for repatriating profits and capital and imposes few restrictions on foreign ownership of Maltese firms (Malta - Foreign investment, 2011). However, due to the sovereign debt crisis in other EU nations causing the Euro's weaker currency and unstable exchange rate, Malta's competitive position has been impacted compared to Guernsey. Despite this challenge, Malta boasts a highly skilled workforce that is multilingual with strong computer skills. As a result, it could potentially serve as a location for Quattroporte to establish a European customer service center in the future. In contrast

to Malta's 5% tax rate, Ireland maintains a corporate tax rate of 12%.

Ireland is proud to have the Euro as its national currency and be known as the 'Silicon Valley' of Europe. According to the World Economic Global Competitive Report 2012-13, Ireland benefits from political stability and strong health and education systems, including opportunities for higher education and training. These factors contribute to a sophisticated and innovative business culture. Many major multinational companies, such as Google, Facebook, Salesforce, LinkedIn, Hubspot, and others have chosen Ireland as their EMEA headquarters. With a focus on technology, research, and product development, Ireland has a skilled workforce available along with government financial incentives for R&D to attract foreign direct investment.

Quattroporte’s current business plan involves creating a subsidiary to handle international software sales transactions. However, this plan does not consider Ireland as an option because of its high corporate tax rate. Additionally, the weakness of the Euro compared to the Canadian dollar, mentioned earlier in relation to Malta, further diminishes Ireland's competitiveness as a financial processing center.

Globalization ; Comparative Advantage

Technological advancements and the increased globalization, which has reduced trade barriers, have made all three potential offshore locations competitive and attractive for foreign direct investment. A thorough analysis has identified several important factors that contribute to the profitability of this venture.

The main factors that impact the comparative advantage of each nation are corporate tax rates, productivity and availability of human resources, and currency exchange rates. Secondary factors include consumer and capital gains tax policy, foreign direct investment, intellectual property protection, future strategic opportunities, international movement of labor, and repatriation of profits. If there is a change in national tax

policy or a strategic shift at Quattroporte, the cost of an exit strategy is considered.

Primary Factors Most Influencing Profitability

Regarding corporate taxation, Guernsey offers a significant incentive with its zero percent corporate tax rate compared to Malta's effective rate of 4% and Ireland's rate of 12.5%. It should be noted that all three locations have established tax treaties with the Canadian Government.

Under the 2011 Guernsey and Canada Tax Agreement, the Malta tax treaty effective 1988, and the new Canada-Ireland Income Tax Convention, Quattroporte will not face double taxation in any of the locations. In Guernsey, there are no taxes on dividends, capital gains, inheritance, VAT, or non-Guernsey income for trusts without Guernsey resident beneficiaries. The Irish Taxes Consolidation Act (Section 486C) offers a short-term incentive for new Irish companies incorporated after October 14th, 2008. These companies can enjoy a 0% tax rate on profits up to 320,000 Euros within the first three years of operation. However, this incentive is not significant enough to affect Ireland's third-place ranking in the recommendation.

Productivity and Availability of Human Resources

The business plan predicts that by year 3, a total of 13 staff members will be necessary to manage a highly automated system processing approximately 75,000 transactions annually. The two senior Canadian employees will report to the director, ensuring continuity of knowledge and seamless integration of systems. They will also play a crucial role in familiarizing the local employees in the new subsidiary with Quattroporte's corporate culture.

This small island with a high cost of living presents challenges in recruitment. However, it is projected that profits in Guernsey will be $CAD 9 million higher than potential annual profits

in Ireland using the same business model. In the Bailiwick of Guernsey, a Right to Work document is required for everyone. Immigration challenges in the Bailiwick of Guernsey, compounded by strict control of the local housing market, with only 10% of housing accessible to non-residents through a housing license, necessitate a well-resourced recruitment strategy for Quattroporte. This strategy should offer compensation that can attract local residents away from other employers. Guernsey wages have been set at current market rates, with a contingency fund included in the business plan to provide labor incentives if needed. Research on currency exchange rates (refer to Figure 1 and Figure 2) indicates that over the past three years, trading between the Canadian dollar and British pound has been more stable and advantageous compared to trading between the Canadian dollar and Euro.

The Euro is under pressure due to the diverse needs of its 23 member nations, with substantial funds being allocated for supporting and bailing out weaker countries. In contrast, the British pound is expected to remain more stable because the United Kingdom has control over monetary policy and holds Canada's second largest export market position.

In terms of consumer taxation, Guernsey has an advantage over Malta and Ireland by not implementing VAT. This results in lower pricing for Business-to-Consumer (B2C) transactions and perceived lower pricing for Business-To-Business (B2B) transactions. Moreover, Guernsey avoids the administrative and remittance expenses associated with VAT in Malta and Ireland.

When it comes to capital gains tax policy, Guernsey provides the most transparent and straightforward approach among the three locations discussed. Corporations based in Guernsey are exempt from capital gains taxation.

In terms of shareholder benefits, Malta provides a

complete reimbursement on capital gains, although this is contingent upon the completion and submission of required documentation. On the contrary, Ireland offers a 30% relief in accordance with double taxation agreements; however, this places it at a disadvantage compared to Guernsey. Guernsey's banking sector positions itself as an industry leader in international banking and prides itself on upholding the highest reputation and adhering to strict standards. Both the International Monetary Fund and the Financial Action Task Force have endorsed Guernsey, thereby instilling confidence when engaging in banking transactions. The growth of Guernsey's banking industry has led to the accumulation of extensive global experience, infrastructure, and intellectual capital.

Quattroporte will have bank accounts in both the Euro and British Pound, which will allow us to maximize revenues through currency trading. In terms of Foreign Direct Investment, the analysis supports the recommendation of establishing a financial processing center in Guernsey. The analysis has identified several key factors that make Guernsey a better choice than Malta and Ireland, including a Return on Investment of 219% in the third year for Guernsey, compared to 166% for Malta and 146% for Ireland. Additionally, in the future, if Quattroporte wishes to expand into Research and Development, Ireland offers significant incentives to attract FDI.

Guernsey offers strong protection for intellectual property rights and has numerous advantages in this area. As an independent and international finance center, Guernsey can swiftly respond to the needs of international businesses in terms of IP. The Intellectual Property Bailiwick of Guernsey Law, 2004, which governs IP rights, is primarily based on UK law but includes updates and enhancements. Guernsey is well positioned to allow corporations to raise funds

by using IP rights as collateral. Additionally, as a regulated and sophisticated offshore financial center, Guernsey has a well-established security law known as The Security Interests (Guernsey) Law 1993. This law allows for the creation of a security interest in any intangible movable property, excluding leases.

In order to strategically and financially benefit in the future, Quattroporte may consider transferring some of its intellectual property (IP) rights to a subsidiary located in Guernsey. This would provide more options and financial instruments for managing transactions within the company, while also utilizing IP rights and transfer pricing to help avoid paying 38% taxes in Canada.

Guernsey's economy has shifted away from declining sectors such as tourism, manufacturing, and horticulture. Instead, it now focuses on financial services like banking, fund management, and insurance. These industries contribute over half of the country's income. When looking at Guernsey's GDP by sector, agriculture accounts for only 3%, industry plays a moderate role with 10%, and services play a significant role at 87%. In contrast, Malta heavily relies on foreign trade, manufacturing, and tourism for its economy. Due to this dependence on imports for food and lack of agricultural foundation (2% GDP), Malta faces certain challenges.

The services industry and manufacturing sectors together make up almost 81% of Malta's GDP, according to data from 2012. Despite the international financial crisis, the financial services industry in Malta experienced only mild effects and is currently expanding. In terms of Purchasing Power Parity, Malta is ranked 150th in the world, placing it between Ireland (57th) and Guernsey (180th) on the scale, as reported by the CIA World Factbook in 2012. Similar to Malta and Guernsey, Ireland's agricultural sector

has significantly declined due to the growth of its industrial and services sectors. Since 2008, Ireland has experienced a noticeable decline in economic activity as a result of the global financial crisis, as well as domestic issues with the construction and property markets. In fact, home prices in Ireland have dropped by an average of 50% from their peak before the crisis.

Stricter regulations were implemented to stabilize the banking industry, and the government accepted a loan package totaling $US 112 Billion. Repatriation refers to the process of returning invested capital or profits from a foreign source country to the host country. With the exception of Malta, which has specific paperwork requirements, there are no laws in place that significantly limit the amount or free movement of repatriated funds from the source country to Canada or any other location. The analysis concludes that all three locations - Malta, Guernsey, and Ireland - offer equal advantages for repatriation of capital and profit. Quattroporte can repatriate profits through traditional means such as dividends, royalty payments, and service payments. However, by keeping as much money as possible in Guernsey, Quattroporte maintains flexibility for future endeavors such as maximizing research and development incentives and expanding into Ireland, or establishing a global customer service subsidiary in Malta.

As mentioned earlier, moving IP assets to Guernsey enables Quattroporte to maximize profits by using transfer pricing and tax avoidance strategies. However, repatriating the money back to Canada carries the risks of foreign exchange currency fluctuations and high tax rates. One possible reason for repatriation is to fulfill cash flow requirements and distribute dividends to the company's shareholders. Considering the potential changes in tax policy

in Guernsey or Malta, it is recommended to evaluate the costs of an exit strategy in order to ensure ongoing profitability. To account for these costs, it is advisable for Quattroporte to allocate a re-location contingency fund in the budget. This fund should cover expenses related to establishing operations in a new location, relocation and customs duties on capital assets, redundancy payments for employees, business disruption, and depreciation in currency.

Conclusion From a taxation perspective, employee productivity, Return on Investment, and currency exchange rates, Guernsey offers the best advantage compared to Malta and Ireland. Despite potential challenges in terms of human resources and the risk of increased corporate taxation, Guernsey is the most profitable host country for a subsidiary specializing in financial transaction processing.

Malta comes in second place to Guernsey, offering comparable advantages such as a multilingual workforce with high levels of computer skills and a relatively low tax rate. This makes it an ideal choice for a customer service hub that provides global support.

However, as a member of the European Union, Malta is facing pressure to raise its corporate tax rate in line with other member nations. Additionally, the utilization of the Euro may have financial implications, especially when repatriating profits over time due to potential devaluation.

Despite Ireland's 12.5% corporate tax rate for companies established within their jurisdiction, the country offers advantages such as a highly skilled and abundant workforce with a high productivity rate among workers. Furthermore, Ireland could be a potential option for Quattroporte to open a research and development center in the region.

Ireland offers attractive financial incentives, including excellent foreign direct investment opportunities.

Bibliography

The Immigration (Bailiwick of Guernsey) ashx? id=5440;p=0 Rules 2008 as amended by The Immigration (Bailiwick of Guernsey) (Amendment) Rules 2011 on 1st June 2011 Retrieved from, http://www. careers. gg/vacancies/legislation. aspx

Ycharts-Economic Indicators (2013). Retrieved Feb 18, 2013, from Malta Inflation Rate: http://ycharts. om/indicators/malta_inflation_rate Ireland Inflation Rate.

(2013, Jan 17)

Retrieved Feb 19, 2013, from Location 4 Business: http://www.locations4business.com/europe/uk/commerce-and-employment-department-of-the-states-of-guernsey/workforce/

The Guernsey Inflation data can be found on the State of Guernsey website, under the link: http://www.gov.gg/rpi. This information was retrieved on February 18, 2013.