Term
| Managing the Multi-National Financial System |
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Definition
The value of the financial system rests in its ability to arbitrage in the following areas:
Tax Systems
Financial markets
Regulatory Systems |
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Term
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Definition
| Wide variations exist in global tax systems, companies want to reduce taxes paid and move funds to low-tax jurisdictions |
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Term
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Definition
Total tax payment are dependent on regulations in both the host and recipient nations.
Many host countries provide tax credits for taxes paid abroad. |
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Term
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Definition
moneys brought back to US after taxes paid in foreign country.
Remittances are taxed, less government credit for taxes paid abroad.
Some companies is low tax countries don't bring money back to US. |
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Term
| Excess foreign tax credits |
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Definition
| tax credits gained from other remittances (example: other subsidiaries bringing money back) can be used to offset taxes due from other parts of the company. |
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Term
| Financial Market Arbitrage (possible given 2 assumptions) |
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Definition
1) Imperfect markets exist
a) formal & informal barriers to trade
b)imperfections in domestic capital markets exist
2) Agree parity conditions not always in effect
a) Interest rate parity
b) international fisher effect |
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Term
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Definition
When subsidiary profits vary due to local regulations:
Examples: Government price controls
Union wage pressures |
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Term
| Commonly used Intercompany fund flow mechanisms |
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Definition
Unbundling
Transfer Pricing
Re-invoicing centers
Fees and Royalties
Leading and Lagging
Intercomany loans
Dividends: Primary mechanism |
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Term
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Definition
| breaks up international transfer of funds of funds between pairs of affiliates into separate components (Allocates profitability) |
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Term
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Definition
Pricing internally traded goods of the firm for the purpose of moving profits to a more tax friendly nation.
A) Reduces taxes paid
B) Reduces ad valorem tariffs paid
C) Avoids exchange Controls |
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Term
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Definition
| Transfer pricing example (in notes and article) |
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Term
| Regulators and transfer pricing |
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Definition
| Governments usually presume transfer pricing is being used and have regulations established |
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Term
Regulators and Transfer Prices:
Revenue Code Section 482 |
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Definition
Arms length Prices:
1) Comparable uncontrolled Price Method
2) Resale Price Method
3) Cost plus method
4) Another appropriation method (Combination) |
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Term
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Definition
Set up in low tax nations.
Center takes title to goods.
Center pays the seller/paid by buyer all within the MNC.
US Changed the law to make it illegal. |
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Term
| Fee and Royalty Mechanism |
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Definition
| Ex) Royalty in exchange for knowledge (Vs trying to collect profits) |
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Term
| Intercompany Loans: 2 Types |
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Definition
Back to Back: Company makes loan to subsidiary. Government won't allow repayment, so they get another loan from a bank.
Parallel Loans: Loans to another company, that then loans to the subsidiary loans. |
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Term
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Definition
Most important method used by MNC's.
Accounts for more than half of remittances to US firms.
Pay Div. to shareholders and give subsidiary their portion. |
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