Dividend of USD .05 for 2018; USD.10 for 2019
Revenue of USD 33.7M; EPS of USD .17
Restructured Businesses Show Positive Results
GUANGZHOU, China, May 21, 2018Sino Agro Food, Inc. (OTCQX: SIAF) (OSE: SIAF-ME), a specialized investment company focused on protein food including seafood and cattle announces results for the quarter ending March 31, 2018.
Under the advisement of its Board of Directors, the Company has decided to issue the following cash dividends for Fiscal Years 2018 and 2019:
- For 2018: $0.05/share to be declared and payable during Q4 2018, date to be determined.
- For 2019: $0.05/share will be declared and paid semi-annually (dates to be determined) for a total cash dividend distribution of $0.10/share for the year. In addition, five percent (5%) of the amount exceeding the Company’s annual net income of $20 million in FY2019 will be paid as an additional cash dividend to be declared and payable during the subsequent fiscal year (i.e. sometime during FY 2020).
It is the Company’s intention to carry-forward the cash dividend policy being implemented for FY2019 into subsequent years of operation, and will inform its investors as to its cash dividend policy for FY2020, FY2021, etc. as those years approach.
Revenue from the sale of goods decreased USD 26.1M, or 45.5%, to USD 31.3M for the quarter ended March 30, 2018 when compared on a year over year basis (“YoY”). When compared to Q4 2017, revenue from the sale of goods during Q1 2018 increased USD .6M or 2%. Revenue from project development increased USD 1.8M, or 225%, to USD 2.5M sequentially (“QoQ”).
First quarter gross profits totaled USD 6.1M compared to a loss of USD 7.9M QoQ.
Fully diluted earnings per share were USD .17 in the first quarter versus USD .36 YoY and versus a loss of USD 1.04 QoQ.
Results reflect a reprioritization of businesses according to bottom line performance and guided by stricter cost control and capital expense rationale for each. For instance, throughout 2017:
- Businesses with negative gross margins either had been discontinued or markedly curtailed.
- SJAP eliminated losses incurred throughout 2017 by discontinuing its QZH slaughtering and deboning subsidiary.
- SJAP further eliminated losses by limiting its live cattle business to its own farms, settling contracts with cooperative farmers that became unduly onerous due to unsustainable depressed market prices.
- Product mix in the trading business is being transitioned toward higher profit margin items.
- Gross margin is being increased at HSA by transitioning into more efficient production.
- Capital expenditure for all businesses was reduced, most notably at SIAF’s equity investee Tri-way, which restricts project development to a percentage of cash flow and as justified by individual projects, until outside cash resources become available to continue development of aquafarms 4 and 5.
- G&A expenses were trimmed USD 2.4M, or 37% from USD 6.5M in Q1 2017 to USD 4.1M in Q1 2018.
As demonstrated by Q1 financials, these changes have resulted in a smaller, but more profitable company, one situated on more solid footing, positioned for growth stronger than before.
It should be noted that the pace and duration of some of the adverse market conditions required immediate action be taken by the Company could not be fully anticipated. Hence, a consequential cash shortfall had ensued requiring an issuance of shares to cover some of the ordinary operational expenses that typically would have been covered through ordinary cash-flow levels in the past.
The Company has adopted austere measures to reduce its dependence on equity funding by approaching it as the exception rather than the rule when it comes to determining which modes of operation are necessary to maintain the Company’s outlook over the next two years.
Other Key Points
- SIAF’s income from its full 36.6% equity investment in Tri-way (“TW”) increased from USD 3.66M in Q4 2017 to USD 3.78M in Q1 2018.
- Revenue from project development at SIAF’s wholly owned Capital Award (“CA”) subsidiary increased from USD .8M in Q4 2017 to USD 2.5M in Q1 2018.
- These results from TW and from CA reflect Tri-way’s “Plan B” strategy, which limits TW’s capital expenditures and CA’s revenue from project development attributable to TW to a percentage of TW’s net income. TW is still profitable and growing. “Plan A” would greatly accelerate growth upon successful closing of its anticipated debt financing.
- As of March 31 2018, the Company had net working capital of USD 183.9M, a quarterly increase of USD 15.5M.
- Stockholders’ equity increased in the quarter by USD 18.7M to USD 631.1M.
|(USD M, except per share and margin data)||Q1 ’18||Q1 ’17||%|
|Gross Profit Margin||18.1%||20.4%||(11%)|
|Earnings Per Diluted Share (FD) (USD) – from continuing
and discontinued operations
The Company achieved the following results, comparing the first quarter of 2018 to the fourth quarter of 2017:
|(USD M, except per share and margin data)||Q1 ’18||Q4 ’17||%|
|Gross Profit Margin||18.1%||N/A||N/A|
|Earnings Per Diluted Share (FD) (USD) – from continuing
and discontinued operations
The following table breaks out revenue by business segment, comparing the first quarter of 2018 to the fourth quarter of 2017:
|Revenue (USD M)||Q1 ’18||Q4 ’17||%|
|Integrated Cattle Farm (SJAP)||6.6||15.4||(44%)|
|Organic Fertilizer (HSA)||2.4||1.8||33%|
|Cattle Farms (MEIJI)||5.0||(2.7)||N/A|
|Seafood & Meat Trading||16.4||15,0||9%|
|Sale of Goods Total||31.4||30.6||3%|
|Project Development Total||2.5||.8||200%|
Integrated Cattle (SJAP)
The Integrated Cattle Farm business segment (SJAP) discontinued its value-added processing subsidiary (QZH) December 30, 2017. Factoring out QZH, SJAP revenue increased by USD 2.6 M, or 42% from USD 6.2M in Q4 2017 to USD 8.8M in Q1 2018. Gross profits increased USD .5M, or 28% to USD 2.3M in Q1. QZH had negative gross margin both in Q4 2017 and for the entire year.
As reported in previous quarters, the cattle market has endured depressed pricing for over 18 months. The Company had already dramatically reduced the sale of live domestic cattle due to unprofitable conditions. Live cattle sales are now generated only from SJAP’s own farm without any beef production from cooperative farms, which were generating negative gross margins. Thus, at present SJAP is a smaller business than in previous years but one that generates positive gross profits with good margins (28% in Q1) and requires considerably less capital expenditure.
SJAP is fortunate to enjoy excellent working relationships with various government agencies. These private company/state agency relationships are more important in China than in western countries. Recent discussions have produced progress toward transitioning and growing SJAP’s business, while maintaining expense discipline:
- SJAP has developed a cattle and meat trade center (“C&MT”) concept to transition from a beef producer into primarily a commercial developer in the cattle industry. During late February 2018 through early March 2018 and supported by local government officials, SJAP hosted a series of investor conferences with financial institutions, developers, traders, fund managers, businessmen, and professionals of various cattle related commercial activities to introduce the C&MT concept. The concept was well received and has drawn initial interest from a highly reputable Guangzhou investment firm, as well as a Government backed securities and investment company. SJAP will work with these institutions to secure the necessary capital to meet its long-term development plan.
- SJAP is preparing documentation required to apply for C&MT permit, which would allow SJAP the right to develop and to operate the C&MT center. The submission is targeted sometime in Q2 2018. The application process takes several months. If granted, the Company is confident it will provide SJAP a lucrative opportunity to develop one of the largest cattle trade centers in China.
Organic Fertilizer (HSA)
Revenue at HSA increased by USD .6M, or 33% from USD 1.8 M in Q4 2017 to USD 2.4M in Q1 2018. Gross profits increased by USD .25M or 50% from USD .5M in Q4 2017 to USD .75M in Q1 2018.
HSA’s production has been capacity constrained due to the retrofitting of a production plant. Production increased by 16% QoQ in Q1 2018 to 4,161 MT of Organic fertilizer compared to Q4 2017’s 3,578 MT, and by 21% to 3,100 MT of Organic Mixed Fertilizer in Q1 2018 compared to Q4 2017’s 2,566 MT.
The Company expects continued quarterly production increases in the short term.
Cattle Farms (MEIJI)
Revenue for Q1 2018 totaled USD 5.0M and generated a gross profit of USD .5M.
The MEIJI farms are growing and fattening Asian Yellow Cattle (“AYC”). The domestic prices of AYC have not being affected by imports; however, their growth rate is slower due to small stature, which in turn reduces volume and therefore sales. AYC generates higher gross profits. For example, AYC sales of $20.4 million in 2017 produced $3.77 million in gross profit compared to $1.5 million of gross profit derived from WOBC sales of $29.8 million in 2016.
This quarter some of the AYC being stocked have not reached sufficient sizes to market, due to the Chinese New Year break, because cattle purchased after the CNY have less time to be fattened enough to meet sales in the same quarter. Therefore, the Company expects increased sales and gross profit next quarter.
Revenue at JHST decreased by USD .05M, or 5% from USD 1.1M in Q4, 2017 to USD 1.05M in Q1 2018. Gross profits also declined by USD .05M or 50% from USD .2M in Q4 2017 to USD .15M in Q1 2018.
JHST is experimenting with a variety of crops that may prove less susceptible to the vagaries of weather in Guangdong province, as well as new processes aimed to mitigate the same issues.
In addition, JHST is processing and repackaging Immortal Vegetable into an herbal health tea product (“HHTP”), which has attracted the interest of one of China’s best brand names in health and herbal products. JHST herbal health tea products (The HHTP) have been accepted by one of their franchisees during March 2018.The Company is working on trials with the processor over the coming months with the aim to launch HHTPs onto an e-commerce platform. If HHTP is launched successfully, there is good potential over time for JHST’s plantation to generate sustainable sales revenues in excess of 2016 or 2017 levels, with very strong gross margins.
Seafood and Meat Trading (Corporate)
Revenue from Seafood and Meat trading increased by USD 1.4M, or 9% from USD 15.0M in Q4 2017 to USD 16.4M in Q1 2018. Gross profits also increased by USD .05M or 3% from USD 1.7M in Q4 2017 to USD 1.75M in Q1 2018.
The Company expects sales and gross profit on beef imports for the coming quarters will improve as more higher grade goods carrying better margins have been ordered to arrive starting in Q2. Import seafood sales have increased during the quarter and are expected to continue throughout the coming quarters as more suppliers gain confidence in our distribution channels.
Engineering Technology, Consulting and Services — Project Development (CA)
Revenue from project development increased by USD 1.6M, or 200% from USD .8M in Q4 2017 to USD 2.4M in Q1 2018. Gross profit was USD .8 compared to a loss in the previous quarter.
Profit from this segment is not expected to return to previous levels until cash flow and debt financing is available to carry out Tri-way’s fishery development and Vigor’s wholesale development. The Company is confident that the pace of revenue growth will rapidly accelerate once Tri-way secures adequate debt financing. The process to secure this funding continues forward, an announcement of which will be made public once its closing takes place.
“We are pleased to see our restructuring initiatives take hold as improved operational efficiency strengthened our bottom line results, compared with Q4 2017,” commented Mr. Solomon Lee, CEO of Sino Agro Food.
“At SJAP, the Integrated Cattle Farm, we took steps to reduce our fixed costs in response to increased price competition from abroad, including eliminating our QZH slaughtering and deboning subsidiary, and scaling back the live cattle business. Having reorganized these unprofitable business areas, we are now implementing several initiatives to position the Company to build out new revenue streams. Supported by our close ties to local government agencies, we believe our lean operations give us a strong foundation on which to achieve this goal. As an example, we are exploring plans to establish a commercial cattle and meat trade center, which would further diversify the Company’s operations within China’s protein market and enable us to reposition ourselves in a new but related vertical.
“We also made progress at the HU plantation (JHST), which suffered from unfavorable weather conditions in 2017. To counterbalance the decline in sales, we commenced processing and repackaging a new herbal health tea product, which is already being sold at a franchise of one of China’s best brand names in health and herbal products. We are encouraged by this opportunity and are exploring ways to leverage this new revenue stream to generate additional sales.
“The trading business generated improved revenues and gross margins, across both meat and seafood, as our strategy to transition toward higher quality, and higher margin, products positively impacted results. To support this new product mix, we are building out our distribution channels, and believe our early success will continue throughout 2018. Likewise, sales and gross margins improved at HSA as we scaled up production of organic fertilizer, following the completion of the retrofitting of our production plant.
“Tri-way and CA Award generated slightly improved results compared with Q4 2017 as the businesses grow at a gradual pace. We expect the true potential of these operations will be realized if and when Tri-way secures additional funding. Although this process is taking longer than initially expected, this continues to be a core component of the Company’s long term growth strategy.
“Given the positive direction the Company is moving in, the Board of Directors has approved a dividend to further its commitment to unlocking value for shareholders. We believe the progress we have made throughout the first quarter demonstrates our flexibility in the face of changing market conditions, our willingness to rapidly identify new growth opportunities, and our ability to execute on these plans. While the business is smaller than it was a year ago, primarily as a result of increased competition from foreign imports, it is also leaner, better organized and well positioned to take advantage of new opportunities. As a result of these strategic changes, we now have a strong foundation on which to strengthen the business and grow the Company’s market value,” concluded Mr. Lee.
Q1 2018 Interim Report
For detailed segment operational performance and developments, please take the time to read our latest 10-Q filing, or refer to the Q1 2018 Interim Report posted to the Company website at http://sinoagrofood.investorroom.com/download/Sino-Agro-Food_Q1-2018-Interim-Report.pdf.
Lockdown 2.0 – Here’s how to be the best-looking person in the virtual room
suggests “the product you’re creating is not the camera, the lens or a webcam’s clever industrial design. It’s the subject, you, which is just on e part of the entire image they see. You want that image to convey quality, not convenience.”
Technology experts at Reincubate saw an opportunity in the rise of remote-working video calls and developed the app, Camo, to improve the video quality of our webcam calls. As part of this, they consulted the digital photography expert and author, Jeff Carlson, to reveal how we can look our best online.
It’s clear by now that COVID-19 has normalised remote working, but as part of this the importance of video calls has risen exponentially. While we’re all used to seeing the more casual sides of our colleagues (t-shirt and shorts, anyone?), poor webcam quality is slightly less forgivable.
But how can we improve how we look on video? We consulted Jeff Carlson for some top tips– here is what he had to say.
- Improve the picture quality of your call
The better your camera, the higher quality your webcam calls will be. Most webcams (as well as currently being hard to get hold of and expensive), are subpar. A DSLR setup will give you the best picture, but will cost $1,500+. You can also use your iPhone’s amazing camera as a webcam, using the new app from Reincubate, Camo.
Jeff’s comments “The iPhone’s camera system features dedicated coprocessors for evaluating and adjusting the image in real time. Apple has put a tremendous amount of work into its imaging software as a way to compensate for the necessarily small camera sensors. Although it all works in service of creating stills and video, you get the same benefits when using the iPhone as a webcam.”
Aidan Fitzpatrick, CEO of Reincubate explains why the team created Camo, “Earlier this year our team moved to working remotely, and in video calls everyone looked pretty bad, irrespective of whether they were on built-in Mac webcams or third-party ones. Thus began my journey to build Camo: an iPhone has one of the world’s best cameras in it, so could we make it work as a webcam? Category-leading webcams are noticeably worse than an iPhone 7. This makes sense: six weeks of Apple’s R&D spend tops Logitech’s annual gross revenue.”
- Place your camera at eye level
A video call will never quite be the same as a face-to-face conversation, but bringing your camera up to eye level is a good place to start. That can involve putting your laptop on a stand or pile of books, mounting a webcam to the top of your display screen, or even using a tripod to get the perfect position.
Jeff points out, “If the camera is looking down on you, you’ll appear minimized in the frame; if it’s looking up, you’re inviting people to focus on your chin, neck, or nostrils. Most important, positioning the camera off your eye level is a distraction. Look them in the eye, even if they’re miles or continents away.”
Low camera placement from a MacBook
- Make the most of natural lighting
Be aware of the lighting in the room and move yourself to face natural lighting if you can. Positioning the camera so any natural light is behind you takes the light away from your face, which can make it harder to see and read expressions on a call.
Jeff Carlson’s top tip: “If the light from outside is too harsh, diffuse it and create softer shadows by tacking up a white sheet or a stand-alone diffuser over the window.”
Backlit against a window Facing natural light
- Use supplementary lighting like ring lights
The downside to natural lighting is that you’re at the mercy of the elements: if it’s too bright you’ll have the sun in your eyes, if it’s too dark you won’t be well lit.
Jeff recommends adding supplementary lighting if you’re looking to really enhance your video calls. After all, it looks like remote working will be carrying on for quite some time.
“The light can be just as easy as a household or inexpensive work light. Angle the light so it’s bouncing off a wall or the ceiling, depending on your work area, which, again, diffuses the light and makes it more flattering.
Or, for a little money, use a softbox or a shoot-through umbrella with daylight bulbs (5500K temperature), or if space is tight, LED panels. Larger lights are better for distributing illumination– don’t be afraid to get them in close to you. Placement depends on the look you’re going after; start by positioning one at a 45-degree angle in front and to the side of you, which lights most of your face while retaining nice shadow detail.”
In some cases, a ring light may work best. LEDs are arranged in a circle, with space in the middle to put the camera’s lens and get direct illumination from the direction of the camera.
- Centre yourself in the frame
Make sure you’re getting the right angle and that you’re using the frame effectively.
“You should aim for people to see your head and part of your torso, not all the space between your hair and the ceiling. Leave a little space above your head so it’s not cut off, but not enough that someone’s eyes are going to drift there.”
- Be mindful of your backdrop
It’s not always easy to get the quiet space needed for video calls when working from home, but try as best you can to remove anything too distracting from your background.
“Get rid of clutter or anything that’s distracting or unprofessional, because you can bet that will be the second thing the viewers notice after they see you. (The Twitter account @RateMySkypeRoom is an amusing ongoing commentary on the environments people on television are connecting from.)”
A busy background as seen by a webcam
- Make the most of virtual backgrounds
If you’re really struggling with finding a background that looks professional, try using a virtual background.
Jeff suggests: “Some apps can identify your presence in the scene and create a live mask that enables you to use an entirely different image to cover the background. While it’s a fun feature, the quality of the masking is still rudimentary, even with a green screen background that makes this sort of keying more accurate.”
- Be aware of your audio settings
Our laptop webcams, cameras, and mobile phones all include microphones, but if it’s at all possible, use a separate microphone instead.
“That can be an inexpensive lavalier mic, a USB microphone, or a set of iPhone earbuds. You can also get wireless lavalier models if you’re moving around during a call, such as presenting at a whiteboard in the camera’s field of view.
The idea is to get the microphone closer to your mouth so it’s recording what you say, not other sounds or echoes in the room. If you type during meetings, mount the mic on an arm instead of resting it on the same surface as your keyboard.”
- Be wary of video app add-ons
Video apps like Zoom include a ‘Touch up your appearance’ option in the Video settings. This applies a skin-smoothing filter to your face, but more often than not, the end result looks artificially blurry instead of smooth.
“Zoom also includes settings for suppressing persistent and intermittent background noise, and echo cancellation. They’re all set to Auto by default, but you can choose how aggressive or not the feature is.”
- Be the best looking person in the virtual room
What’s important to remember about video calls at this point in time is that most people are new to what is, really, personal broadcasting. That means you can easily get an edge, just by adopting a few suggestions in this article. When your video and audio quality improves, people will take notice.
Bringing finance into the 21st Century – How COVID and collaboration are catalysing digital transformation
By Keith Phillips, CEO of TISATech
If just six or seven months ago someone had told you that in a matter of weeks people around the world would be locked down in their homes, trying to navigate modern work systems from a prehistoric laptop, bickering with family over who’s hogging the Wi-Fi, migrating online to manage all financial services digitally, all while washing their hands every five minutes in fear of a global pandemic… You’d think they had lost their mind. But this very quickly became the reality for huge swathes of the world and we’re about to go through that all over again as the UK government has asked that those who can work from home should.
Unsurprisingly, statistics show that lockdown restrictions introduced by the UK government in March, led to a sharp increase in people adopting digital services. Banks encouraged its customers to log onto online banking, as they limited (and eventually halted) services at branches. This forced many customers online as their primary means of managing personal finances for the first time.
If anyone had doubts before, the Covid-19 pandemic proved to us the importance of well-functioning, effective digital financial services platforms, for both financial institutions and the people using them.
But with this sudden mass online migration, it’s become clear that traditional banks have struggled to keep up with servicing clients virtually. Legacy banking systems have always stilted the digitisation of financial services, but the pandemic thrust this issue into the limelight. Fintech firms, which focus intently on digital and mobile services, knew it was only a matter of time before financial institutions’ reliance was to increase at an unprecedented rate.
For years, fintechs have been called upon by traditional players to find solutions to problems borne from those clunky legacy systems, like manual completion of account changes and money transfers. Now it is the demand for these services to be online coupled with the need for financial services firms to cut costs, since Covid-19 hit the economy.
Covid-19 has catalysed the urgent need to bring digital transformation to a wider pool of financial services businesses. Customers now have even higher expectations of larger institutions, demanding that they keep up with what the younger and more nimble challengers have to offer. Industry leaders realise that they must transform their businesses as soon as possible, by streamlining and digitising operations to compete and, ultimately, improve services for their customers.
The race for digital acceleration began far before the recent pandemic – in fact, following the 2008 financial crisis is likely more accurate. Since the credit crunch, there has been a wave of new fintech firms, full of young, bright techies looking to be the next big thing. Fintechs have marketed themselves hard at big conferences and expos or by hosting ‘hackathons’, trying to prove themselves as the fastest, most innovative or the most vital to the future of the industry.
However, even during this period where accelerating innovation in online financial services and legacy systems is crucial, the conditions brought about by the pandemic have not been conducive to this much-needed transformation.
The second issue, which again was clear far before the pandemic, is that fact that no matter how nimble or clever the fintechs’ solutions are, it is still hard to implement the solutions seamlessly, as the sector is highly fragmented with banks using extremely outdated systems populated with vast amounts of data.
With the significance of the pandemic becoming more and more clear, and the need for better digital products and services becoming more crucial to financial services firms and consumers by the day, the industry has finally come together to provide a solution.
The TISAtech project was launched last month by The Investing and Saving Alliance (TISA), a membership organisation in the UK with more than 200 leading financial institutions as members. TISA asked The Disruption House, a specialist benchmarking and data analytics business, to create a clearing house platform for the industry to help it more effectively integrate new financial technology. The project aims to enhance products and services while reducing friction and ultimately lowering costs which are passed on to the customers.
With nearly 4,000 fintechs from around the world participating, it will be the world’s largest marketplace dedicated to Open Finance, Savings, and Investment.
Not only will it provide a ‘matchmaking’ service between financial institutions an fintechs, it will also host a sandbox environment. Financial institutions can pose real problems with real data and the fintechs are given the space to race to the bottom – to find the most constructive, cost-effective solution.
Yes, there are other marketplaces, but they all seem to struggle to achieve a return on investment. There is a genuine need for the ‘Trivago’ of financial technology – a one stop shop, run by an independent body, which can do more than just matchmaking. It needs to go above and beyond to encompass the sandboxing, assessments, profiling of fintechs to separate the wheat from the chaff, and provide a space for true collaboration.
The pandemic has taught us that we are more effective if we work together. We need mass support and collaboration to find solutions to problems. Businesses and industries are no different. If fintechs and financial institutions can work together, there is a real chance that we can start to lessen the economic hit for many businesses and consumers by lowering costs and streamlining better services and products. And even if it is just making it that little bit easier to manage personal finances from home when fighting with your children for the Wi-Fi, we are making a difference.
What to Know Before You Expand Across Borders
By Sean King, Director of International Tax at McGuire Sponsel
The American retail giant, Target Corporation, has a market cap of $64 billion and access to seemingly limitless resources and advisors. So, when the company engaged in its first global expansion, how could anything possibly go wrong?
Less than two years after opening its first Canadian store in 2013, Target shut down all133 Canadian locations and terminated more than 17,000 Canadian employees.
Expansion of an operation to another country can create unique challenges that may impact the financial viability of the entire enterprise. If Target Corporation can colossally fail in its expansion to Canada, how might Mom ‘N’ Pop LLC fare when expanding into Switzerland, Singapore, or Australia?
Successful global expansion requires an understanding of multilayered taxes, regulatory hurdles, employment laws, and cultural nuances. Fortunately, with the right guidance, global expansion can be both possible and profitable for businesses of any size.
Any company with global ambitions must first consider whether the company’s expansion outside of the U.S. will give rise to a taxable presence in the local country. In the cross-border context, a “permanent establishment” can be created in a local country when the enterprise reaches a certain level of activity, which is problematic because it exposes the U.S. multinational to taxation in the foreign country.
Foreign entity incorporation
To avoid permanent establishment risk, many U.S. multinationals choose to operate overseas through a formal corporate subsidiary, which reduces the company’s foreign income tax exposure, though it may result in an additional level of foreign income tax on the subsidiary’s earnings. In most jurisdictions, multinationals can operate their business in the foreign country as a branch, a pass through (e.g., partnership,) or a corporation.
As a branch, the U.S. multinational does not create a subsidiary in the foreign country. It holds assets, employees, and bank accounts under its own name. With a pass through, the U.S. multinational creates a separate entity in the foreign country that is treated as a partnership under the tax law of the foreign country but not necessarily as a partnership under U.S. tax law.
U.S. multinationals can also create corporate subsidiaries in the foreign country treated as corporations under the tax law of both the foreign country and the U.S., with possibly two levels of income taxation in the foreign country plus U.S. income taxation of earnings repatriated to the U.S. as dividends.
Under U.S. entity classification rules, certain types of entities can “check the box” to elect their classification to be taxed as a corporation with two levels of tax, a partnership with pass-through taxation, or even be disregarded for U.S. federal income tax purposes. The check the box election allows U.S. multinationals to engage in more effective global tax planning.
Toll charges, transfer pricing and treaties
When establishing a foreign corporate subsidiary, the U.S. multinational will likely need to transfer certain assets to the new entity to make it fully operational. However, in many cases, the U.S. multinational cannot perform the transfer without recognizing taxable income. In the international context, the IRS imposes certain outbound “toll charges” on the transfer of appreciated property to a foreign entity, which are usually provided for in IRC Section 367 and subject to various exceptions and nuances.
Instead, the U.S. multinational may prefer to license intellectual property to the foreign subsidiary for a fee rather than transfer the property outright. However, licensing requires the company and foreign subsidiary to adhere to transfer pricing rules, as dictated by IRC Section 482. The U.S. multinational and the foreign subsidiary must interact in an arms-length manner regarding pricing and economic terms. Furthermore, any such arrangement may attract withholding taxes when royalties are paid across a border.
Are you GILTI?
Certain U.S. multinationals opt to focus on deferring the income recognition at the U.S. level. In doing so, they simply leave overseas profits overseas and delay repatriating any of the earnings to the U.S.
Despite the general merits of this form of planning, U.S. multinationals will be subject to certain IRS anti-deferral mechanisms, commonly known as “Subpart F” and GILTI. Essentially, U.S. shareholders of certain foreign corporations are forced to recognize their pro rata share of certain types of income generated by these foreign entities at the time the income is earned instead of waiting until the foreign entity formally repatriates the income to the U.S.
The end goal
Essentially, all effective international tax planning boils down to treasury management. Effective and early tax planning can properly allow a company to better achieve its initial goal: profitability.
If global expansion is on the horizon for your company, consult a licensed professional for advice concerning your specific situation.
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