Taxes Multinational Corporate Strategy.ppt

chapter17taxes&multinationalcorporatestrategy,17.1theobjectivesofnationaltaxsystems17.2typesoftaxation17.3u.s.taxationofforeign-sourceincome17.4taxesandorganizationalform17.5transferpricingandtaxplanning17.6taxesandthelocationofforeignoperations17.7taxesandcross-bordermergersandacquisitions17.8summary,theincometax.,theincometaxhasmademoreliarsoutoftheamericanpeoplethangolfhas.willrogers,theobjectivesoftaxneutrality,domestictaxneutrality-incomesarisingfromdomesticandforeignoperationsaretaxedsimilarlybythedomesticgovernmentforeigntaxneutrality-taxesimposedontheforeignoperationsofdomesticfirmsarethesameasthosefacinglocalcompetitorsinthehostcountries,violationsoftaxneutrality,taxesvaryonincomefromdifferentsourcestaxjurisdictions:foreignordomesticorganizationalforms:foreignbranchesorincorporatedsubsidiariesassetclasses:interest,dividends,orcapitalgainsfinancinginstruments:taxdeductibilityofinterestondebt,formsoftaxation,explicittaxescorporateandpersonalincometaxeswithholdingtaxesondividends,interestandroyaltiessalesorvalue-addedtaxespropertyorassettaxestariffsoncross-bordertrade,formsoftaxation,implicittaxesthelawofonepriceinafter-taxform“equivalentassetssellforthesameafter-taxexpectedreturn”countrieswithlowtaxratestendtohavelowbefore-taxexpectedandrequiredreturns,theeffectofimplicittaxesonrequiredreturns,examplecountryftf=50%andif=20%yieldareturnofif(1tf)=20%(1-0.5)=10%after-taxcountrydiftd=20%,whatisidinequilibrium?,theeffectofimplicittaxesonrequiredreturns,equalafter-taxreturnsmeansif(1-tf)=id(1-td)20%(1-0.5)=id(1-0.2)=10%id=10%/(1-0.2)=12.5%a20%returnata50%taxrateisequivalenttoa12.5%after-taxreturnata20%taxrate.,taxesonforeign-sourceincome,twobasictypesoftaxationsystemsaworldwidetaxsystemtaxesforeign-sourceincomeasitisrepatriatedtotheparentcompany.aterritorialtaxsystemleviesataxonlyondomesticincome.taxesonforeign-sourceincomeareonlypaidinthecountryinwhichtheyareearned.,u.s.taxationofforeignsourceincome,intheworldwidetaxsystemoftheunitedstatesincomefromforeignsubsidiariesistaxedasitisrepatriatedtotheparentincomefromforeignbranchesistaxedasitisearned,theorganizationalformofforeignoperations,mostmanufacturingfirmsconducttheirforeignoperationsthroughforeignsubsidiariesincorporationinthehostcountrylimitstheparentsliabilityincorporationavoidshostcountrydisclosurerequirementsontheparentsworldwideoperationsforeignbranchescanbeusedforstart-upoperationsthatareinitiallyexpectedtolosemoney,theorganizationalformofforeignoperations,foreignbranchesaresometimesusedbyfinancialinstitutionsadvantageforeigntaxcredit(ftc)limitationscanbelessbindingforforeignbranchesthanforforeignsubsidiariesdisadvantagesforeignbranchescanbetaxdisadvantagediftheforeignbranchisinalow-taxcountryforeignbranchescanexposethemnctolegalliabilities,ftclimitationsintheu.s.,taxstatementsassinglesubsidiariescanadaisraelitalyadividendpayoutratio(%)100100100bforeigndivwithholdingrate(%)555cforeigntaxrate(%)263640dforeignincomebeforetax($s)100010001000eforeignincometax(d*c)260360400fafter-taxforeignearnings(d-e)740640600gdeclaredasdividends(f*a)740640600hforeigndivwithholdingtax(g*b)373230itotalforeigntax(e+h)297392430jdividendtou.s.parent(d-i)703608570,ftclimitationsintheu.s.,taxstatementsassinglesubsidiaries(continued)irelanditalyfrancekgrossforeignincbeforetax(d)100010001000ltentativeustax(k*35%)350350350mftc-foreigntaxcredit(i)297392430nnetustaxpayable(maxl-m,0)5300ototaltaxespaid(i+n)350392430pnetamounttou.s.parent(k-o)650608570qtotaltaxesseparately(so)$1,172,ftclimitationsintheu.s.,parentsconsolidatedtaxstatementroverallftclimitation(sk*35%)$1,050stotalconsolidatedftcs(si)$1,119tadditionalu.s.taxesdue(max0,r-s)$0uexcessftcs(max0,s-r)$69(carriedback2yearsorforward5years)overallftclimitation=(totalforeign-sourceincome)(u.s.taxrate),incomebasketsactiveincomepassiveincomeother(e.g.,incomefromforeignsalescorporations),additionalftclimitations,incomebasketssubpartfincomeapassiveincomebasketforeignsubsidiariesownedmorethan10percent(e.g.controlledforeigncorporations,orcfcs)foreignholdingcompanyincomeforeignbasecompanysalesorserviceincome,additionalftclimitations,incomebasketssubpartfincomeincomeandexpenseallocationallocationofinterestexpenseallocationofr&dexpenseallocationofotherexpenses,additionalftclimitations,effectofshiftingsalestolow-taxcountries,taxstatementsassinglesubsidiariescanadaisraelitalyadividendpayoutratio(%)100100100bforeigndivwithholdingrate(%)555cforeigntaxrate(%)263640dforeignincomebeforetax($s)200010000eforeignincometax(d*c)5203600fafter-taxforeignearnings(d-e)14806400gdeclaredasdividends(f*a)14806400hforeigndivwithholdingtax(g*b)74320itotalforeigntax(e+h)5943920jdividendtou.s.parent(d-i)14066080,effectofshiftingsalestolow-taxcountries,taxstatementsassinglesubsidiaries(continued)canadaisraelitalykgrossforeignincbeforetax(d)200010001000ltentativeustax(k*35%)700350(0)mftc-foreigntaxcredit(i)5943920nnetustaxpayable(maxl-m,0)1060(0)ototaltaxespaid(i+n)700392(0)pnetamounttou.s.parent(k-o)13006080qtotaltaxesseparately(so)($1092),parentsconsolidatedtaxstatementoriginalshiftedroverallftclimitation(sk*35%)$1,050$1,050stotalconsolidatedftcs(si)$1,119$986tadditionalu.s.taxesdue(max0,r-s)$0$64uexcessftcs(max0,s-r)$69$0(carriedback2yearsorforward5years)overallftclimitation=(totalforeign-sourceincome)(u.s.taxrate),effectofshiftingsalestolow-taxcountries,offshorefinancesubsidiaries,thetaxreformactof1986removedthetaxadvantagesforu.s.firmsoftax-havenaffiliatesmanymncsretainoff-shorefinancesubsidiariesasreinvoicingcentersreinvoicingcentersshouldbeincountrieswithdevelopedinfrastructureincludingbanking,transportation,andcommunicationfacilitiesastableandconvertiblecurrencywithaccesstotheinternationalcurrencyandeurocurrencymarketslowtaxrates(incomeandwithholding)lowpoliticalrisk,transferpricingandtaxplanning,mncshaveataxincentivetoshiftrevenuestolow-taxcountriesshiftexpensestohigh-taxcountriesmostnationalandinternationaltaxcodesrequirethattransferpricesbesetasiftheyarearms-lengthtransactionsbetweenunrelatedparties,anexampleofthegamespeopleplayau.s.-basedmncproducesbeefinargentinaforexporttohungaryrevenuesare$10,000inhungaryproductionexpenseis$3,000inargentina$1,000offixedexpenseineachcountrytheincometaxrateinargentinais35%theincometaxrateinhungaryis18%atwhatpriceshouldthetransferfromargentinatohungarybemade?,transferpricingandtaxplanning,transferpricemarket-basedcost-plusarghunbotharghunbothtaxrate35%18%35%18%revenue8000100001000050001000010000cogs300