International Tax Fundamentals

Tour Championship Memorabilia (Hong Kong) Ltd (TCM) is a company that was incorporated in Hong Kong SAR on 1 July 2003 to sell cycling memorabilia. TCM's current shareholder/directors are Snave Ledac (a professional cyclist and dual Australian and United Kingdom citizen), Anna Passi (an Italian citizen and Snave's wife), and Guy Hillsong-Smyth (an Australian resident and Snave's manager). Anna is also TCM's graphic designer.

Since 2003 it has conducted internet based sales of various cycling memorabilia. The sales orders come from Australia (40%), France (20%), Italy (10%), Spain (10%) and 20% from buyers in other jurisdictions. The server hosting the on-line shop is located in Hong Kong. TCM also receives income in respect of memorabilia sold on consignment by an independent unrelated Australian resident company, Cycling Down Under Ltd (CDU). CDU operates on-line stores in Australia and New Zealand and is headquartered in Adelaide. For more expensive items TCM often will sell buy instalments. These short-term loan agreements are prepared in their country of residence on-line but approved in Hong Kong. The repayment of capital and interest is made by bank transfers from the buyer's bank account.

Snave, who was born in Australia, was a resident of Australia until March 2001 when he left Australia to pursue a career as a professional cyclist with a Spanish based team (Pedro) competing in the Union Cycliste Internationale (UCI) World Tour which runs from March to October throughout Europe, Canada, and China, and in Australia in January. After his initial four year contract with Pedro he has subsequently had three year contracts with three other teams (based in Italy, France and Luxembourg respectively) earning salary, prize money, and endorsements from European sponsors. Since 2004, in between racing events and a training camp in Spain, he has lived in a luxury rented apartment in Monaco with his artist wife Anna.

Despite his professional commitments he has represented Australia at the 2008 and 2012 Olympics and completed in the Tour Down Under event in South Australia from 2010 to 2014. In 2011 he bought a house in the Gold Coast hinterland where he spends December and January (when not competing in the Tour Down Under). He has also briefly visited Australia for short promotional tours of a week to 10 days once a year over the last five years. Given his profile in Australia and that his career is coming to an end, he is thinking of returning to Australia when he retires from professional cycling.

TCM's board meetings are held electronically. Anna establishes the connection from Monaco, Guy logs on from Australia while Snave logs on from either Monaco or the various countries in which he is competing. The directors deal with any follow up matters through e-mail. However there have been two face to face meetings, one in Adelaide during the Tour Down Under and the other at whilst they were all holidaying in Norfolk Island.

Part A: Is Snave a resident of Australia?

Part B: Is any of TCM's income subject to tax in Australia?

Part C: Would your answer to Part B been different if Snave and Anna were appointed as directors by Guy, who was TCM's managing director? If so explain why.

Do not discuss the impacts, if any, of withholding tax, foreign source income anti-deferral regimes (eg controlled foreign company (CFC) rules) and Double Tax Treaties.

Question 2: Philistine Ltd, a resident of Australia, manufactures and retails sporting goods. It has recently established sales offices in the United States and China, and a factory in Hong Kong and seeks your advice on the Australian tax consequences of the following transactions for the income year ending 30 June 2014 -

1. Interest income derived from an investment by the US sales office in US municipal bonds: The US sales office does not repatriate its profits to Australia. Instead it invests surplus profits in US municipal bonds and US shares. The interest income is exempt from US tax.

2. The sale of tennis rackets by the Hong Kong factory to customers in China: The tennis rackets are manufactured by the branch in Hong Kong, shipped to the China sales office in Beijing, and sold by the China office to customers in China. All raw materials and components are sourced in Hong Kong.

Part A: Advise Philistine Ltd on the Australian income tax effects of these arrangements.

Part B: Would your answer to Part A been different had the sales offices in the United States and China, and the Hong Kong factory each been conducted through subsidiary companies incorporated in each country? If so, briefly explain why.

Question 3: Chic Co Ltd is incorporated and managed in Macau. It has an office in Melbourne which sells hand bags produced by its wholly owned subsidiary resident in Hong Kong, Hong Kong Co (BVI) (a British Virgin Islands incorporated company). Hong Kong Co (BVI) is contracted to manufacture the hand bags using patents supplied by Chic Co Ltd. Under that contract Hong Kong Co (BVI) is required to sell the manufactured bags to the Melbourne branch of Chic Co Ltd. The mark-up on the manufactured cost of the bags is 1200% based on Resale Price Method. A mark-up of 300% is used for bags delivered to independent retailers in Macau.

Income year sales revenue from the Melbourne branch has remained constant at about $5m a year. The hand bags have a market value of $4m when shipped to Melbourne. Selling costs in Melbourne are $650,000. Chic Co incurs interest expense on money borrowed from the Hong Kong branch of NAB to fit out a new showroom for the Melbourne office of $100,000. Head office also charges a management fee of $100,000 to the branch made up of $25,000 interest on an internal loan by head office to the branch and $75,000 for the branch's share of external costs incurred by Chic Co for accounting, auditing and similar costs.

(a) When preparing its 2014 tax return Chic Co seeks your advice on how much of its income is taxable in Australia and whether any interest withholding tax is payable on the interest paid to NAB.

(b) If the Melbourne Branch had been an incorporated company, how would your advice vary?