Foundations of Multinational Financial Management Alan Shapiro John Wiley

1
Foundations of Multinational Financial
Management Alan Shapiro John Wiley Sons

• Power Points by
• Joseph F. Greco, Ph.D.
• California State University, Fullerton

2
Managing the Multinational Financial System

• Chapter 20

3
MANAGING 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

4
TAX ARBITRAGE

• A. Tax Arbitrage
• 1. Wide variations exist in global
• tax systems
• 2. Firms reduce taxes paid
• -move funds to low-tax jurisdiction

5
FINANCIAL MARKET ARBITRAGE

• 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.

6
REGULATORY ARBITRAGE

• 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

7
INTERCOMPANY FUND-FLOWMECHANISMS

• 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.

8
INTERCOMPANY FUND-FLOWMECHANISMS

• 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.

9
INTERCOMPANY FUND-FLOWMECHANISMS

• c. Offset
• Foreign tax credit given on
• income already tax.

10
TRANSFER PRICING

• 2. Transfer Pricing
• a. Definition pricing internally
• traded goods for the purpose of moving
  profits to a more
• tax-friendly nation.

11
TRANSFER PRICING

• b. Uses of Transfer Pricing
• 1.) Reduces taxes paid
• 2.) Reduces ad valorem tax
• 3.) Avoids exchange controls

12
REINVOICING CENTERS

• 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.

13
REINVOICING CENTERS

• e. 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.

14
LEADING AND LAGGING

• 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.

15
INTERCOMPANY LOANS

• 6. Intercompany Loans
• a. Useful when following present
• 1.) Credit rationing
• 2.) Currency controls
• 3.) Differential tax rates

16
INTERCOMPANY LOANS

• 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.

17
INTERCOMPANY LOANS

• c.) Advantages
• (1.) protects against confiscation
• (2.) reduces taxes
• (3.) accesses blocked funds

18
PARALLEL LOANS

• 2.) Parallel loans
• a.) Consists of 2 related but separate
• loans with 4 parties in 2 nations.
• b.) Purpose of parallel loan
• (1.) repatriate blocked funds
• (2.) avoid currency controls
• (3.) reduce currency exposure

19
DIVIDENDS

• 7. Dividends
• most important method of transferring
• funds to parents

20
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

21
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

22
DESIGNING A GLOBAL REMITTANCE POLICY

• B. Information Requirements (cont)
• 5. Transaction volume
• 6. Relevant tax factors
• 7. Government restrictions on transfer of
  funds.