Alan Shapiro 10 th Edition John Wiley amp Sons Inc PowerPoints by Joseph F Greco PhD California State University Fullerton CHAPTER 20 Managing the Multinational Financial System ID: 547232
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Multinational Financial Management Alan Shapiro10th Edition John Wiley & Sons, Inc.
PowerPoints
by
Joseph F. Greco, Ph.D.
California State University, FullertonSlide2
CHAPTER 20
Managing the Multinational Financial SystemSlide3
MANAGING THE MULTINATIONAL FINANCIAL SYSTEM
I. THE VALUE OF THE MULTINATIONAL FINANCIAL SYSTEM Its value lies in its ability to arbitrage in the following areas: 1. Tax systems 2. Financial markets 3. Regulatory systemsSlide4
TAX ARBITRAGE
Tax Arbitrage is possible because we know: 1. Wide variations exist in global tax systems examples: Germany vs. Honk Kong 2. Firms want to reduce taxes paid especially the “triple-taxed” MNC move funds to low-tax jurisdiction Slide5
TAX ARBITRAGE
3. Tax Factors (triple taxation): a. Triple Taxes may be levied on 1.) corporate income 2.) personal income (includes dividends) 3.) subsidiary income b. U.S. Tax System Provision Offset: Foreign tax credit given on
tax already paid abroad.Slide6
FINANCIAL MARKET ARBITRAGE
Financial Market Arbitrage is possible if we 1. assume imperfect markets exist because a. Formal barriers to trade exist b. Informal barriers also exist c. Imperfections in domestic
capital markets exist
2. agree parity conditions not in effect, namely
a. interest rate parity
b. International Fisher EffectSlide7
REGULATORY ARBITRAGE
Regulatory Arbitrage: 1. Arises when subsidiary profits vary due to local regulations. 2. Examples of local regulations: a. Government price controls b. Union wage pressures: Firms may disguise true profits in order to gain better negotiations advantages Slide8
INTERCOMPANY FUND-FLOW
MECHANISMSII. INTERCOMPANY FUND-FLOWMECHANISMS: the name given to the methods used to move funds from one subsidiary to another.
Slide9
INTERCOMPANY FUND-FLOW
MECHANISMSCOMMONLY USED MECHANISMS:
A. Unbundling
B. Transfer Pricing
C.
Reinvoicing
Centers
D. Royalties
E. Leading and Lagging
F. Mechanism: DividendsSlide10
UNBUNDLING
A. Unbundling Mechanism breaks up a total international transfer of funds between pairs of affiliates into separate components Example: Headquarters breaks down charges for corporate overhead (wages, rent, utilities, etc.) by affiliateSlide11
TRANSFER PRICING
B. Transfer Pricing Mechanism 1. Definition: pricing internally traded goods of the firm for the purpose of moving profits to a more tax-friendly nation.Slide12
TRANSFER PRICING
2. Uses of Transfer Pricing a. Reduces taxes paid b. Reduces tariffs c. Avoids exchange controlsSlide13
TRANSFER PRICING:An Example
Suppose that affiliate A produces 100,000 circuit boards for $10 apiece and sells them to affiliate B. Affiliate B, in turn, sells these boards for $22 apiece to an unrelated customer. Pretax profit for the consolidated company is $1 million regardless of the price at which the goods are transferred for A to B.Slide14
TRANSFER PRICING:An Example
Basic rules: Between Affiliate A and BIf tax rateA > tax rateB , set the transfer price and the mark-up policy as LOW as possible.If tax rate
A
< tax
rate
B
,
set the transfer price and the mark-up policy as HIGH as possible.Slide15
TRANSFER PRICING:An Example
Without markup policy A B A+BRevenue 1,500 2,200 2,200CGS <1,000> <1,500> <1,000>Gross Profits 500 700 1,200
Expenses
<100> <100> <200>
Income b/t
400 600 1,000
Taxes (30/50)
<120> <300> <420>
Net Income
280 300 580Slide16
TRANSFER PRICING:An Example
HIGH MARK-UP POLICY (unit price = $18) A B A+BRevenue 1,800 2,200 2,200CGS <1,000> <1,800> <1,000>
Gross Profits
800 400 1,200
Expenses
<100> <100> <200>
Income b/t
700 300 1,000
Taxes (30%/50%)
<210> <150> <360>
Net Income
490 150 640Slide17
TRANSFER PRICING:An Example
In effect: Profits are shifted from a higher to a lower tax jurisdictionSlide18
REINVOICING CENTERS
C. Mechanism: Reinvoicing Centers 1. Set up in low-tax nations. 2. Center takes title to all gods. 3. Center pays seller/paid by buyer all within the MNC.Slide19
REINVOICING CENTERS
4. Advantages: a. Easier control on currency exposure b. Invoice currency other than localSlide20
REINVOICING CENTERS
5. Disadvantages of Reinvoicing a. Increased communications costs b. Suspicion of tax evasion by local governments.Slide21
FEES AND ROYALTIES
D. Mechanism: Royalties 1. Firms have control of payment amounts. 2. Host governments less suspiciousSlide22
LEADING AND LAGGING
E. Leading and Lagging 1. Highly favored by MNCs 2. Often used instead of formal debt: may be prohibited by local government 3. Less chance of local government suspicion.Slide23
DIVIDENDS!
F. Mechanism: Dividends most important method used by MNCs to transfer funds to parentSlide24
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