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CHAPTER 14

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.

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CHAPTER 14

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  1. CHAPTER 14 MANAGING THE MULTINATIONAL FINANCIAL SYSTEM

  2. 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

  3. 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

  4. 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

  5. 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.

  6. 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

  7. 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.

  8. 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.

  9. 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.

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

  11. 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.

  12. 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.

  13. 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.

  14. INTERCOMPANY FUND-FLOWMECHANISMS: COSTS AND BENEFITS • 6. Intercompany Loans • a. Useful when following present: • 1.) Credit rationing • 2.) Currency controls • 3.) Differential tax rates

  15. 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.

  16. 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.

  17. 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

  18. 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

  19. 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

  20. DESIGNING A GLOBAL REMITTANCE POLICY • B. Information Requirements (con’t) • 5. Transaction volume • 6. Relevant tax factors • 7. Government restrictions on transfer of funds.

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