MANAGING THE MULTINATIONAL FINANCIAL SYSTEM

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CHAPTER 14

• MANAGING THE MULTINATIONAL FINANCIAL SYSTEM

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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

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I. THE VALUE OF THE MULTINATIONAL FINANCIAL
SYSTEM

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

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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

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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.

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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

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II. INTERCOMPANY FUND-FLOWMECHANISMS 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.

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INTERCOMPANY FUND-FLOWMECHANISMS 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.

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INTERCOMPANY FUND-FLOWMECHANISMS COSTS AND
BENEFITS

• c. Offset
• Foreign tax credit given on
• income already tax.
• 2. Transfer Pricing
• a. Definition pricing internally
• traded goods for the purpose of moving
  profits to a more tax-friendly nation.

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INTERCOMPANY FUND-FLOWMECHANISMS COSTS AND
BENEFITS

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

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INTERCOMPANY FUND-FLOWMECHANISMS 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.

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INTERCOMPANY FUND-FLOWMECHANISMS COSTS AND
BENEFITS

• 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.

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INTERCOMPANY FUND-FLOWMECHANISMS 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.

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INTERCOMPANY FUND-FLOWMECHANISMS COSTS AND
BENEFITS

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

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INTERCOMPANY FUND-FLOWMECHANISMS 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.

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INTERCOMPANY FUND-FLOWMECHANISMS COSTS AND
BENEFITS

• c.) 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.

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INTERCOMPANY FUND-FLOWMECHANISMS COSTS AND
BENEFITS

• b.) 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

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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

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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

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DESIGNING A GLOBAL REMITTANCE POLICY

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