International business by czinkota 7ech18

Chapter 18
Corporate Governance,
Accounting, and Taxation

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Learning Objectives
To explore the purpose and structure of corporative
governance as it is practiced globally
To examine the failures in corporate governance
in recent years and how authorities are responding
to these changes
To understand how accounting practices differ across
countries and how these differences may alter the
competitiveness of firms in international markets
To isolate which accounting practices are likely to constitute
much of the competitiveness debate in the coming decade
To examine the primary differences in international taxation
across-countries and in turn how governments deal with both
domestic and foreign firms operating in their markets
To understand problems faced by many U.S.-based
multinational firms in paying taxes both in foreign countries
and in the United States.
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Introduction
The structure and conduct of
corporate governance and the
methods used in the measurement

of company operations,
accounting, principles, and practice
vary dramatically across countries
Taxation and accounting are
fundamentally related
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Corporate Governance
The relationship among stakeholders
used to determine and control strategic
direction and performance of an
organization is termed corporate

governance

The way in which order and process is
established to ensure that decisions are
made and interests are represented
properly for all stakeholders
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The Goal of Corporate
Governance
The single
overriding
objective of
corporate
governance is the

optimization over
time of the return
to shareholders

The most widely accepted
statement of good corporate
governance practices are
those established by OBECD
The rights of shareholders
The equity treatment of
shareholders
The role of stakeholders in
corporate governance
Disclosure and transparency
The responsibilities of the board
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The Structure of Corporate
Governance
The internal forces, the officers of the corporation
and the Board of directors, are those directly
responsible for determining the strategic direction
and the execution of the company’s future
The external forces include:
The equity markets
The analysts
The creditors and credit agencies who lend them money
The auditors
The multitude of regulators

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Auditors and Regulators
Auditors are
responsible for
providing an external
professional opinion
as to the fairness and
accuracy of corporate
financial statements
These individuals
follow the generally

accepted accounting
principles

Regulatory oversight
of publicly traded
firms in the U.S. is
provided by
governmental and
nongovernmental
agencies
Securities and
Exchange Commission
(SEC)
Applicable stock
exchange
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Comparative Corporate
Governance
Corporate governance
practices differ across
countries, economies, and
cultures and may be classified
by regime
Market-based
Family-based
Bank-based
Government-based
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Comparative Corporate
Governance (cont.)
Corporate governance regimes
are a function of three major
factors in the evolution of
global corporate governance
principles and practices
Financial market development
Degree of separation between
management and ownership
Concept of disclosure and
transparency

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The Case of Enron
Many of the issues related to
corporate governance and its
failures are best described by the
Enron case
Enron Corporation declared
bankruptcy in November 2001 as a
result of a complex combination of
business and governance failures
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Corporate Governance
Reform
The debate regarding what needs to be
done about corporate governance
reform depends on which systems and
regimes are deemed superior
To date, reform in the United States has
been largely regulatory
Sarbanes-Oxley Act
Board structure and compensation
Transparency, accounting, and auditing
Minority shareholder rights
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Accounting Diversity

The fact that accounting
principles differ across
countries is not, by itself,
a problem
The primary problem is
that real economic
decisions by lenders,
investors, or government
policymakers may be
distorted by the
differences
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Principal Accounting Differences
Across Countries
International accounting diversity
can lead to problems in international
business conducted with the use of
financial statements
Poor or improper decision making
Hindering the ability to raise capital in
differing markets
Hindering from monitoring competitive
factors
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Principal Differences: The Issues
The resulting impact of accounting differences

is to separate or segment international
markets for investors and firms alike
Communicating the financial results of a
foreign company operating in a foreign country
and foreign currency is often a task that must
be undertaken separately from the accounting
duties of the firm
Nine major areas of significant differences in
accounting practices across countries serve to
provide understanding of this issue and
highlight some of the major philosophical
differences
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Principal Differences: The Issues
Accounting for research and development
expenses
Accounting for fixed assets
Inventory accounting treatment
Capitalizing or expensing leases
Pension plan accounting
Accounting for income taxes
Foreign currency translation
Accounting for mergers and acquisitions
Consolidation of equity securities holdings
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The Process of Accounting

Standardization
There is still some
conflict over the
terminology of
harmonization,
standardization, or
promulgation of uniform
standards
1966 study of accounting
differences across
countries conducted by
Accountants
International Study
Group

First strong movement
toward accounting
standardization was the
establishment of the
International Accounting
Standards Committee
(IASC) in 1973
Two other recent
developments concerning
international
standardization merit
consideration
General Electric Company
Financial Accounting
Standards Board (FASB)16

International Taxation
Governments alone have the
power to tax
Governments want to tax all
companies within their
jurisdiction without placing
burdens on domestic or foreign
companies that would restrain
trade
Each country will state its
jurisdictional approach in the tax
treaties it signs with other
countries
Treaties establish the bounds of
jurisdiction to prevent double
taxation
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Tax Jurisdictions and
Tax Types
Nations usually
follow one of two
basic approaches
to international
taxation
Residential
approach

Territorial or
source approach

Taxes are generally
classified one of
two ways
Direct Taxes
Indirect Taxes

The value-added
tax (VAT) is the
primary revenue
source for the
European Union
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Income Categories and
Taxation
There are three primary
methods used for the
transfer of funds across
tax jurisdictions
Royalties
Interest
Dividends

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U.S. Taxation of
Foreign Operations
The U.S. exercises its rights to tax U.S.
residents’ income regardless of where the
income is earned
The income of a foreign branch of a U.S.
corporation is treated the same as if the
income was derived from sources within the
U.S.
Corporations operating in more than one
country are subject to double taxation
The calculation of foreign income taxes
deemed paid and the additional U.S. taxes due
involves the interaction of four components
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Calculations of U.S. Taxes on
Foreign-Source Earnings: Four Cases
Foreign affiliate of a U.S. corporation
in a high-tax environment
Foreign affiliate of a U.S. corporation
in a low-tax environment
Foreign affiliate of a U.S. corporation
in a low-tax environment, 50 percent
payout
Foreign subsidiary of a U.S.
corporation is a CFC in a low-tax
environment
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Concluding Remarks Regarding U.S.
Taxation of Foreign Income
Recent accounting and tax rule changes
may actually result in worsening the
effective tax rate and excess foreign tax
credit problem for U.S. corporations
Fuel is being added to the fires of world
governments and their shares of the
world tax pie

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