FINAL PROJECT

Training program:
Master of Business Administration
Subject:
International Corporate Tax
Send to: accounting@eneb.com

ENEB Business School

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 TABLE OF CONTENTS

Content(s) Page(s)

Background……………………………………………………………………..3-4

Resolve 1......................................................................................... …….. 5-8

Resolve 2......................................................................................... ……... 9

Resolve 3......................................................................................... ……... 10-12

Reference.................................................................................................. 13

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 BACKGROUND

The company, North S.L., has the following information in the Balance Sheet and
Profit and Loss Account for 2016, before calculating its Corporate Tax:
BALANCE SHEET
ASSETS LIABILITIES
69.360,00 A) NON CURRENT ASSET A) NET EQUITY 105.130,00

4.860,00 1. Intangible asset A-1) Equity 60.000,00

4.860,00 1. R+D 1. Capital 60.000,00
4.860,00 201 DEVELOPMENT 1. Issued capital 60.000,00
64.500,00 II. Tangible Fixed Assets 100 SOCIAL CAPITAL 19.500,00

64.500,00 2. Technical facilities and others. III. Funds 12.000,00

52.000,00 213 MACHINERY 1. Legal y statuary 12.000,00
8.000,00 216 FURNITURE 112 LEGAL FUNDS 7.500,00
3.500,00 17 INFORMATION PROCESSING EQUIP. 2. Other funds 7.500,00
25.000,00 218 TRANSPORT 113 VOLUNTEER FUND 25.630,00
-24.000,00 281 CUMULATIVE DEPRECIATION VII. Result of the fiscal year 32.000,00

104.050,00 B) CURRENT ASSET B) NON-CURRENT LIABILITY 32.000,00

20.500,00 II. Stock II. Long-term debts 32.000,00
20.500,00 1. Commercial 5. Other financial liabilities 32.000,00

20.500,00 300 GOODS 171 LONG-TERM DEBTS 36.280,00

16.250,00 III. Debtors C) CURRENT LIABILITY 6.100,00
11.850,00 1. Clients (sales and services) III. Short-term debts 6.100,00
11.850,00 b) Clients (sales and services) short-term 5. Other financial liabilities 6.100,00
14.300,00 430 CLIENTS 523 SUPPLIERS 30.180,00
1.800,00 431 CLIENTS, COMMERCIAL PURPOSE V. Creditors 11.200,00
-4.250,00 490 VALUE IMPAIRMENT 1. Suppliers 11.200,00
4.400,00 6. Other credits with Public Adminis. b) Short-term suppliers 11.200,00
4.400,00 473 PUBLIC FINANCES, WITHOLDINGS 400 SUPPLIERS 18.980,00
67.300,00 VII. Cash 3. Different Creditors 18.980,00
67.300,00 1. Treasury 410 Creditors 105.130,00
2.200,00 570 CASH FLOW, EUROS
65.100,00 572 BANKS AND CREDIT INSTITUTIONS

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173.410,00 T OTAL ASSETS TOTAL NET EQUITY AND LIABILITIES 173.410,00

LOSS AND PROFIT ACCOUNT

1. Net revenue 204.300,00
700 SALES OF GOODS 200.000,00
705 PROVISION OF SERVICES 5.500,00
708 SALES RETURNS -1.200,00
4. Supplies -69.800,00
600 PURCHASE OF GOODS -72.450,00
610 CHANGE IN INVENTORY 2.650,00
6. Staff costs -75.170,00
640 WAGES AND SALARIES -56.800,00
642 SOCIAL SECURITY -16.470,00
649 OTHER SOCIAL EXPENSES -1.900,00
7. Other operating costs -19.850,00
626 BANK SERVICES -700,00
627 ADVERTISING AND PR -3.600,00
628 SUPPLIES -3.800,00
629 OTHER SERVICES -7.100,00
631 OTHER TAXES -400,00
694 IMPAIRMENT LOSSES -4.250,00
8. Depreciation - 13.950,00
681 DEPRECIATION - 13.950,00
12. Other outcomes - 600,00
678 EXTRA COSTS - 600,00
A) ACTIVITY OUTCOME 24.930,00
13. Financial income 700,00
b) Other financial income 700,00
769 OTHER FINANCIAL INCOME 700,00
B) FINANCIAL OUTCOME 700,00
C) INCOME BEFORE TAXES 25.630,00
D) FISCAL YEAR OUTCOME 25.630,00

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1. Make in each of the following points the adjustment needed to obtain the
tax base of the Corporate Tax, basing the response and establishing the amount
that corresponds. You must also indicate if you are facing a temporary or
permanent difference. In points 8 and 9 you should not propose any adjustment, in
these two cases you should describe how they affect the liquidation of the
Corporate Tax.

1. The machinery was acquired for € 52,000 in January 2014. An

accounting depreciation expense of € 7,000 is provided. Fiscally a maximum
amortisation coefficient of 12% and a maximum period of 18 years is
established.

Answer: The accounting depreciation is EUR 7,000; however, the tax

depreciation is EUR 6,240 (EUR 52,000*12%). The difference is EUR 760 in
this case (EUR 7,000 - EUR 6,240). This difference is a tax asset that has
been deferred. It is a balance sheet item that indicates a tax overpayment in
the previous year. This will result in a lower tax bill this year. This is just a
temporary difference.

2. The transport element or vehicle was acquired on January 1, 2013,

with a price of € 25,000 and a useful life of 5 years. The accounting
amortisation is carried out using the method of decreasing digit numbers.

Answer: The tax base and accounting base are the same at the time of
purchase of the car, implying that the amount depreciated over the next 5
years will be the same for both purposes, which is
EUR 25,000. A different way of depreciating the car may be suggested by
corporate tax legislation. Assume that the corporation tax regulations dictate
that the asset be depreciated using the straight-line approach (EUR 5,000
each year). The tax basis is now EUR 20,000, but the accounting base is
EUR 16,666 at the end of a year. However, at the end of year 5, i.e., the end
of the useful life, the difference is zero. An excel model is attached for
reference:

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 Depreciation schedule-Accounting
Year Opening Decreasing Depreciation Closing
Carrying Digits Carrying
Amount Amount
31-Dec-13 €25,000.00 5 €8,333.33 €16,666.67
31-Dec-14 €16,666.67 4 €6,666.67 €10,000.00
31-Dec-15 €10,000.00 3 €5,000.00 €5,000.00
31-Dec-16 €5,000.00 2 €3,333.33 €1,666.67
31-Dec-17 €1,666.67 1 €1,666.67 €0.00
15

3. Provision of € 1,250 is provided for a debt that occurs on

October 1, 2016. The liability has not been claimed judicially.

Answer: To calculate income, the sum of € 1,250 will be permitted as an

expense in the Profit and Loss Account. The tax base of the corporation tax
will be reduced. Once the obligation is claimed judicially as a reversal of
temporary difference that is permissible in this year, the sum will be returned
to the Profit and Loss account as revenue.

4. A provision for insolvencies of € 3,000 is provided, an obligation that

has already been judicially claimed.

Answer: The sum of € 3,000 will be brought back into the computation of
profit as reported in the profit and loss statements, so increasing the
corporation tax base. As it is an obligation that has previously been judicially
claimed, this is a reversal of a prior temporary difference that was granted
earlier this year.

5. The administrators have been paid for the performance of senior

management functions with € 10,000.

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Answer: This is deductible for tax reasons, and the tax base will be reduced
by € 10,000 because of it. The distinction between accounting profit and
taxes profit is not permanent. As a result, a deferred income tax
asset/liability will arise.

6. An administrative penalty of € 600 has been imposed on the

company.

Answer: This sum is not deductible for tax purposes, and it will not reduce
the tax base (or if it is already used as deduction, it will be added back). The
difference between accounting profit and taxes profit is permanent. As a
result, no deferred income tax asset or liability will be created.

7. The company has paid the posters for a sports conference for its
employees. This serves to advertise their products and services and has
cost € 1,200. The company gave the customers who attended the event a
batch of products worth € 2,200. Extraordinarily, he has given his employees
an assortment of products worth € 400.

Answer: The firm paid € 1,200 for posters to market their products and
services at a sports conference for their workers. This expense is
chargeable to profit and will be deducted in the profit and loss account, it will
not result in any temporary or permanent change.

In addition, the firm provided a batch of products worth € 2,200 to

consumers who attended the event, this expenditure is chargeable to profit
and will be deducted in the profit and loss account under sales promotion; it
will not result in any temporary or permanent change:

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The firm has provided its workers a selection of items costing € 400 - this
expense is chargeable to profit and will be deducted from the profit and loss
account as compensation to employees; it will not incur any temporary or
permanent differences.

8. The company is entitled to a deduction for having made investments

affected to R & D of € 1,200.

Answer: This indicates that the corporation has taken a tax deduction for
the investment in the year it was made. The asset's tax base is zero, and
the carrying amount exceeds the tax base. Because the Carrying amount
exceeds the Tax Base, there is a Taxable Temporary Difference, and the
corporation should create a Deferred Tax Asset.

9. The company has made installment payments of € 4,400.

Answer: The firm has made € 4,400 in installment payments, which will
have no effect on attaining the Corporate Tax base because there is no
temporary or permanent difference. It is a loan repayment, and the interest
component will be added to interest expenditures which is chargeable to
profit. The principal portion will be removed from the outstanding loan.

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2. Calculate the liquidation of the Corporate Tax in a word document, using the
following scheme.:
$
Accounting result

+/- Permanent differences

Interest in exempted municipal bond -15000
Penalty charged by Tax Authority 9000

+/-Temporary Differences Depreciation 8000

as per accounting
Depreciation as per Tax Law -12000

Set-off for Tax bases from previous -30,000

Tax years

Tax Base 60,000

Tax Base is adjustment of all above

Tax Rate 30%

Tax 18,000

Tax deduction, bonus and other 3,000

withholdings

Withholding and part payments 5,000

Tax difference 10,000

(18000-3000-5000)

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3. North S.L. is thinking of making an international expansion. However, you
need to determine whether to start big in a new market or expand into a potentially
large market, but at a slower and safer pace. The options that the company's
management has are:

a. Enter the North American market, where it is known that their

services can work, but they do not know in depth. They can enter through
Canada and expand across the United States or vice versa.

b. Open slowly but firmly in the Portuguese-speaking market. Due to its

proximity, they know the Portuguese market perfectly, and this would allow
North S.L. access to the Brazilian market, a country with a thriving economy.
To find out which option is more beneficial for North S.L., compare the
possibilities that arise and justify which of the two is better, considering
which country offers better fiscal conditions and that North S.L. seek the
most significant benefit.

Answer:
The choice to grow internationally and which overseas market to enter first
must be made after a thorough examination and analysis of the numerous
hurdles and opportunities. The above-mentioned firm's management is
presented with a difficult dilemma that may be resolved by evaluating what
elements make one market superior to the other. The North American
market, especially the United States and Canada, is a significant one for the
company. On the other hand, the Portuguese market has a weak economy,
but it allows the company to enter the Brazilian market, which is a potentially
enormous market.

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The similarities between the Canadian and US markets outnumber the
differences. Both markets are substantial. However, there are severe rules
and regulations that might make doing business in the country difficult for a
foreign corporation. Due to increasing compliance costs, complexity of rules
and regulations, taxation, intellectual property laws, and other related legal
fees, the two markets are virtually impossible to access. Aside from the legal
expenditures, existing competitors in the Canadian and US markets pose a
significant threat. If a foreign company wants to join the Canadian or
American market, it must be able to develop something that is distinct from
what is presently available. The firm's ability to increase market share in
these two markets may be hampered by the fierce competition.

Even though the Canadian and US markets have a vast customer base,
consumers in the two markets may have distinct tastes and perspectives on
foreign items. The US market is more difficult to penetrate than the
Canadian market since most customers are unlikely to be persuaded to
acquire a foreign product. However, by offering high-quality items that
satisfy the demands of local consumers, this may be addressed. Another
obstacle might be cultural and linguistic differences. Even if the US market is
more varied, the corporation originates from a place where the culture is
more intact than the US market. To compete in the US market, the company
may need to adapt its business model. Expanding into the Portuguese
market may be quite simple for the company. The corporation may incur
reduced costs in conquering this market due to lower entry barriers and the
fact that the nations are near neighbors. It also has extensive understanding
of Portuguese culture, resulting in less cultural and linguistic hurdles. With a
better grasp of the local market, the corporation may develop and implement
methods to enter the Portuguese market that are like those used in the
home market.

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However, as compared to the Canadian and American markets, the client
base is smaller. The company's growth rate would be slower. Given the
expenses of overseas operations, such as compliance and other associated
expenditures, this market, while less profitable than the Canadian and US
markets, may not be as profitable. To break into the Brazilian market, the
country would rely on this market entrance. If it succeeds in the Portuguese
market, it will be simpler to break into the Brazilian market, albeit it will take
some time.

I would recommend the second choice since it is less expensive and allows
the company to establish a market presence in South America. It can readily
reach the US and Canadian markets from the Brazilian market.

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REFERENCES

Retrieved from Eneb Notes

https://www.accaglobal.com/gb/en/student/exam-support-resources/fundamentals-
exams-study-resources/f7/technical-articles/ppe.html

https://taxation-customs.ec.europa.eu/common-consolidated-corporate-tax-base-
ccctb_en

https://www.northamericanincome.co.uk/docs?documentid=GB-300915-24479-1

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