CHAPTER 14

MANAGING THE MULTINATIONAL FINANCIAL SYSTEM

MANAGING THE MULTINATIONAL FINANCIAL SYSTEM CHAPTER 0VERVIEW: I. THE VALUE OF THE MULTINATIONAL FINANCIAL SYSTEM II. INTERCOMPANY FUND-FLOW MECHANISMS: COSTS AND BENEFITS III. DESIGNING A GLOBAL REMITTANCE POLICY

I.

THE VALUE OF THE MULTINATIONAL FINANCIAL SYSTEM I. THE VALUE OF THE MULTINATIONAL FINANCIAL SYSTEM A. Allows MNC to arbitrage 1. Tax systems 2. Financial markets 3. Regulatory systems

THE VALUE OF THE MULTINATIONAL FINANCIAL SYSTEM A. Tax Arbitrage 1. Wide variations exist in global tax systems 2. Firms reduce taxes paid -move funds to low-tax jurisdiction

THE VALUE OF THE MULTINATIONAL FINANCIAL SYSTEM B. Financial Market Arbitrage 1. Assume imperfect markets because a. Formal barriers to trade exist b. Informal also exist c. Imperfections in domestic capital markets exist.

THE VALUE OF THE MULTINATIONAL FINANCIAL SYSTEM C. Regulatory Arbitrage 1. Arises when subsidiary profits vary due to local regulations. 2. Example: a. Government price controls b. Union wage pressures, etc. 3. Firms may disguise true profits in order to gain better negotiations

II. INTERCOMPANY FUND-FLOW MECHANISMS: COSTS AND BENEFITS II.INTERCOMPANY FUND-FLOW MECHANISMS A. MNC Policy: Unbundling breaks up a total international transfer of funds between pairs of affiliates into separate components. B. Example: Headquarters breaks down charges for corporate overhead by affiliate.

INTERCOMPANY FUND-FLOW MECHANISMS: COSTS AND BENEFITS C. Intercompany Fund Flows 1. Tax Factors: a. Taxes available on 1.) corporate income 2.) personal income (includes dividends) b. U.S. Tax System tax income remitted abroad on corporate income tax.

INTERCOMPANY FUND-FLOW MECHANISMS: COSTS AND BENEFITS c. Offset: Foreign tax credit given on income already tax. Transfer Pricing a. Definition: pricing internally traded goods for the purpose of moving profits to a more tax-friendly nation.

2.

INTERCOMPANY FUND-FLOW MECHANISMS: COSTS AND BENEFITS b. Uses of Transfer Pricing 1.) 2.) 3.) Reduces taxes paid Reduces ad valorem tax Avoids exchange controls

INTERCOMPANY FUND-FLOW MECHANISMS: COSTS AND BENEFITS 3. Reinvoicing Centers a. Set up in low-tax nations. b. Center takes title to all gods. c. Center pays seller/paid by buyer all within the MNC. d. Advantages: 1.) Easier currency changing 2.) Other invoice currency, other than local, available.

INTERCOMPANY FUND-FLOW MECHANISMS: COSTS AND BENEFITS Disadvantages of Reinvoicing 1.) Increased communications costs 2.) Suspicion of tax evasion by local governments. 4. Fees and Royalties a. Firms have control of payment amounts. b. Host governments less suspicious. e.

INTERCOMPANY FUND-FLOW MECHANISMS: COSTS AND BENEFITS 5. Leading and Lagging a. Highly favored by MNCs b. Value depends on opportunity cost c. No need for formal debt d. Less chance of local government suspicion.

INTERCOMPANY FUND-FLOW MECHANISMS: COSTS AND BENEFITS 6. Intercompany Loans a. Useful when following present:

1.) 2.) 3.)

Credit rationing Currency controls Differential tax rates

INTERCOMPANY FUND-FLOW MECHANISMS: COSTS AND BENEFITS b. Types of Intercompany Loans 1.) Back-to-back loans a. ) Often called fronting loan b. ) Loan channeled through a bank c. ) Loans collateralized by parent deposit.

INTERCOMPANY FUND-FLOW MECHANISMS: COSTS AND BENEFITS Advantages (1.) protects against confiscation (2.) reduces taxes (3.) accesses blocked funds 2.) Parallel loans a.) Consists of 2 related but separate loans with 4 parties in 2 nations. c.)

INTERCOMPANY FUND-FLOW MECHANISMS: COSTS AND BENEFITS Purpose of parallel loan (1.) repatriate blocked funds (2.) avoid currency controls (3.) reduce currency exposure 7. Dividends most important method of transferring funds to parents b.)

III. DESIGNING A GLOBAL REMITTANCE POLICY

III. DESIGNING A GLOBAL REMITTANCE POLICY A. Factors: 1. Number of financial links 2. Volume of transactions 3. Ownership patterns 4. Product standardization 5. Government regulations

DESIGNING A GLOBAL REMITTANCE POLICY

B. Information Requirements of a Global Remittance Policy -firm needs following details 1. Subsidiary financing requirements 2. Sources/costs of external capital 3. Local investment yields 4. Financial channels available

DESIGNING A GLOBAL REMITTANCE POLICY

B. Information Requirements (cont)

5.
6. 7.

Transaction volume
Relevant tax factors Government restrictions on transfer of funds.