Cargill Transport operates a Canada-wide trucking operation hauling commercial freight. In the past several years, a number of Canadian customers have had requirements involving shipments to their American operations. Cargill does not have operating facilities or licences to operate in the United States and so, until now, has basically ignored this potential market.
Cargill’s Winnipeg operation, however, has had so many requests for foreign hauling that it has set up an arrangement with a Minneapolis-based hauler. The arrangement is that Cargill hauls Canadian freight to the American border and leaves the trailer at the border to be picked up by the American hauler. Likewise, the American hauler brings American freight to the Canadian border and leaves the trailer to be picked up by a Cargill truck.
The arrangement is cumbersome for two reasons:
1. It is difficult to coordinate freight loads to match delivery deadlines, and often, the trucks are returned from the border without a trailer.
2. It is difficult to accurately allocate the fee between the two carriers, as the distance travelled by each is different and operating costs also vary.
Cargill wants to expand its operations into the entire United States. This will have to be done gradually, as Cargill’s resources for expansion are limited. Cargill is owned 50% by a British corporation and 50% by Turnbull Holdings Ltd., a Canadian investment corporation. Turnbull is entirely owned by the Pickle family of Toronto.
Cargill’s executives in Toronto have recently decided to begin expanding into the United States. Winnipeg has been chosen to spearhead the expansion because it is the only location that has any foreign activity and connections. Obtaining a licence to operate in the United States is rather complicated, especially in the highly regulated transportation industry. It is necessary to obtain both state and federal licences. One option, of course, is to acquire a major existing American company that is already licensed throughout the United States, but this is not practical because of Cargill’s financial limitations.
Charles Wheeler, the vice-president (finance), is given the task of developing the American expansion. He wants to establish a base in Minneapolis and obtain a licence permitting hauls from there to Winnipeg. The Winnipeg division of Cargill has 12 vehicles and trailers that are not being fully utilized, and Wheeler decides to relocate these to the United States to establish the company’s presence there. The American base will require a small freight depot as well as parking and repair facilities; however, all major administration, such as accounting and payroll, will still be carried out at the administration office in Winnipeg. An American bank account will be established to collect American fees and pay American expenses.
Wheeler does not know how long it will take for the operations to become profitable, although he is reasonably certain that the route will eventually be lucrative. Wheeler is certain that as the operation grows and experience is gained, more American personnel will be hired to assist in the expansion program. In the meantime, market studies are to be carried out to determine where the next thrust should be.
Before investigating the expansion, Wheeler gathers together what limited information the company has on international taxation and on business organizations in foreign countries (see below).
CARGILL TRANSPORT LTD.
1. Canadian tax rate for Cargill (assumed) …………………25%
2. American tax rates for American corporation*
First $40,000 profit …………………………………………………………20
Next $60,000 profit …………………………………………………………35
Profit over $100,000 ……………………………………………………….43
3. American withholding tax on dividends………………… 5
4. Canadian withholding tax on dividends to the United Kingdom…… 10
* The American tax rates are not actual American rates. They have been arbitrarily chosen to demonstrate various levels of foreign tax that may occur.
Required:
How should Wheeler proceed with the expansion so as to maximize the profits and returns for the entire organization?