Managing the multinational financial system Flashcards
The value of multinational financial system is based on …
move money and profits among its affiliated companies through internal financial transfer mechanisms
Ability to take advantage of
1) tax arbitrage (occurs when firms move funds to lower tax jurisdictions, reduce its tax payments globally)
2) financial market arbitrage (tap previously inaccessible investment and financing opportunities)
3) regulatory system arbitrage (circumvent currency controls and other regulations)
How to take advantage of regulatory arbitrage?
resist government price controls or union wage pressures
What is leading or lagging payments?
Leading - advancing payments - pay for stuff earlier than originally scheduled
Lagging - delaying payments - pay for stuff later than originally scheduled
Expropriation risk can be managed, if need be, by shifting assets out of the country. The major value of leading and lagging is to enable firms to elude exchange and capital controls.
What is reinvoicing center?
Usually set up in low-tax jurisdiction
More communication costs
What is one of the advantages of royalties and fees?
less suspicion by the host government
What is an example of market imperfection?
ceilings on interest rates
What will local government taxing authority use to establish arm’s length pricing?
a) comparable uncontrolled price method
b) resale price method
c) cost-plus method
What is the primary use of Lead and lag?
Tax regulations
What is the general rule for internal shifting based on tax arbitrage when doing transfer pricing?
Always shift profits away from high tax places to low tax places.
for example, if A is selling to B and A is in a low-tax area, then A’s profit should be higher (A should charge a higher price)
What are its distinguishing characteristics?
The MNC has greater control over the mode and timing of these financial transfers
What are some ways that multinational companies can control its fund flow?
1) transfer prices on goods and services traded internally;
2) intra-corporate loans and equity investments,
3) dividend payments,
4) leading (speeding up) and lagging (slowing down) inter-company payments,
5) fee and royalty charges.
Calculate the tax benefit
Write out the payment including all affiliates and clearly understand
1) how much tax should be paid
2) how much tax credits are gained
3) what price is being paid (including tarrifs)
Reinvoicing center
The reinvoicing center takes title to all goods sold by one corporate unit to another affiliate or to a third-party customer, although the goods move directly from the factory or warehouse location to the purchaser.
1) Faster
2) Invoicing in desirable currency - avoid exchange risks
3) better arrange prices
Advantages of leading and lagging
1) No formal note of indebtedness is needed, and the amount of credit can be adjusted up or down by shortening or lengthening the terms on the accounts. Governments do not always allow such freedom on loans.
2) Governments are less likely to interfere with payments on intercompany accounts than on direct loans.
3) Section 482 allows intercompany accounts up to six months to be interest free. In contrast, interest must be charged on all intercompany loans. The ability to set a zero interest rate is valuable if the host government does not allow interest payments on parent company loans to be tax deductible or if there are withholding taxes on interest payments.
Intercompany loans are valuable when
(1) credit rationing (due to a ceiling on local interest rates), (2) currency controls, or
(3) differential tax rates among countries
