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 1 tf 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 intheworldwidetaxsystemoftheunitedstates incomefromforeignsubsidiariesistaxedasitisrepatriatedtotheparentincomefromforeignbranchesistaxedasitisearned theorganizationalformofforeignoperations mostmanufacturingfirmsconducttheirforeignoperationsthroughforeignsubsidiariesincorporationinthehostcountrylimitstheparent sliabilityincorporationavoidshostcountrydisclosurerequirementsontheparent sworldwideoperationsforeignbranchescanbeusedforstart 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 max l m 0 5300ototaltaxespaid i n 350392430pnetamounttou s parent k o 650608570qtotaltaxesseparately so 1 172 ftclimitationsintheu s parent sconsolidatedtaxstatementroverallftclimitation sk 35 1 050stotalconsolidatedftcs si 1 119tadditionalu s taxesdue max 0 r s 0uexcessftcs max 0 s r 69 carriedback2yearsorforward5years overallftclimitation totalforeign sourceincome u s taxrate incomebasketsactiveincomepassiveincomeother e g incomefromforeignsalescorporations additionalftclimitations incomebasketssubpartfincome apassiveincomebasketforeignsubsidiariesownedmorethan10percent 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 max l m 0 1060 0 ototaltaxespaid i n 700392 0 pnetamounttou s parent k o 13006080qtotaltaxesseparately so 1092 parent sconsolidatedtaxstatementoriginalshiftedroverallftclimitation sk 35 1 050 1 050stotalconsolidatedftcs si 1 119 986tadditionalu s taxesdue max 0 r s 0 64uexcessftcs max 0 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 revenue8000100001000050001000010000cogs30008