Professional Documents
Culture Documents
Multinational Financial
System
TAX ARBITRAGE
Tax Arbitrage is possible because we know:
1. Wide variations exist in global
tax systems
examples:
2. Firms want to reduce taxes paid
especially the triple-taxed MNC
move funds to low-tax jurisdiction
TAX ARBITRAGE
3. Tax Factors (triple taxation):
a. Taxes may be levied on
1.) corporate income
2.) personal income
(includes dividends)
3.) subsidiary income
b. U.S. Tax System Provisions
Offset:
Foreign tax credit given on
tax already paid abroad.
REGULATORY ARBITRAGE
Regulatory Arbitrage
1. Arises when subsidiary profits vary
to local regulations.
2. Examples of local regulations:
a. Government price controls
due
INTERCOMPANY FUND-FLOW
MECHANISMS
II. INTERCOMPANY FUND-FLOW
MECHANISMS:
the name given to the methods used to
move funds from one subsidiary to another.
INTERCOMPANY FUND-FLOW
MECHANISMS
COMMONLY USED MECHANISMS:
A.
B.
Unbundling
Transfer Pricing
C.
Reinvoicing Centers
D.
E.
Royalties
Leading and Lagging
F.
Mechanism: Dividends
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 by affiliate.
TRANSFER PRICING
B.
TRANSFER PRICING
2.
b.)
c.)
Reduces tariffs
Avoids exchange controls
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.
TRANSFER PRICING:
An Example
Basic rules:
If tA > tB , set the transfer price and the mark-up
policy as LOW as possible.
If tA < tB , set the transfer price and the mark-up
policy as HIGH as possible.
TRANSFER PRICING:
An Example
Without markup policy
A B
A+B
Revenue
1,500
CGS
<1,000>
Gross Profits
500
Expenses
<100>
Income b/t
400
Taxes (30/50) <120>
Net Income
280
2,200
2,200
<1,500> <1,000>
700
1,200
<100>
<200>
600
1,000
<300>
<420>
300
580
TRANSFER PRICING:
An Example
A+B
Revenue
1,800
CGS
<1,000>
Gross Profits
800
Expenses
<100>
Income b/t
700
Taxes (30/50) <210>
Net Income
490
2,200
2,200
<1,800> <1,000>
400
1,200
<100>
<200>
300
1,000
<150>
<360>
150
640
TRANSFER PRICING:
An Example
In effect:
Profits are shifted from a higher to a lower tax
jurisdiction
REINVOICING CENTERS
C. Mechanism: Reinvoicing Centers
1.
2.
3.
REINVOICING CENTERS
d.
Advantages:
1.)
2.)
REINVOICING CENTERS
e. Disadvantages of Reinvoicing
1.)
Increased communications
2.)
costs
Suspicion of tax evasion by
local governments.
D. Mechanism: Royalties
1.
2.
2.
3.
DIVIDENDS!
F. Mechanism: Dividends
most important method used by MNCs to
transfer funds to parent