Multinational financial management 7th CH20

Multinational Financial
Management
Alan Shapiro
7th Edition
J.Wiley & Sons
Power Points by
Joseph F. Greco, Ph.D.
California State University, Fullerton

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CHAPTER 20
MANAGING THE
MULTINATIONAL
FINANCIAL SYSTEM
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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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I.
THE VALUE OF THE
MULTINATIONAL FINANCIAL SYSTEM
I. THE MNC’s DISTINCT VALUE
A. Allows MNC to arbitrage
1. Tax systems
2. Financial markets
3. Regulatory systems

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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
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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.
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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
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II. INTERCOMPANY FUND-FLOW
MECHANISMS: 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.
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INTERCOMPANY FUND-FLOW
MECHANISMS: COSTS AND BENEFITS
C.
Inter-company 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.
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INTERCOMPANY FUND-FLOW
MECHANISMS: COSTS AND BENEFITS
c. Offset:
Foreign tax credit given on
income already tax.
2. Transfer Pricing
a. Definition: pricing internallytraded goods for the
purpose of
moving profits
to a more tax-friendly
nation.
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INTERCOMPANY FUND-FLOW
MECHANISMS: COSTS AND BENEFITS
b.

Uses of Transfer Pricing
1.) Reduces taxes paid
2.) Reduces ad valorem

tax
3.) Avoids exchange
controls
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INTERCOMPANY FUND-FLOW
MECHANISMS: 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.
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INTERCOMPANY FUND-FLOW
MECHANISMS: 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.
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INTERCOMPANY FUND-FLOW
MECHANISMS: 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.
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INTERCOMPANY FUND-FLOW
MECHANISMS: COSTS AND BENEFITS
6. Intercompany Loans
a. Useful when following
present:
1.) Credit rationing
2.) Currency controls
3.) Differential tax rates
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INTERCOMPANY FUND-FLOW
MECHANISMS: COSTS AND BENEFITS
b. Types of Inter-company Loans
1.) Back-to-back loans
a. )
Often called fronting
loan
b. )
Loan channeled through
a bank
c. )
Loans collateralized by

parent deposit.

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INTERCOMPANY FUND-FLOW
MECHANISMS: 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.
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INTERCOMPANY FUND-FLOW
MECHANISMS: 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
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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
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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

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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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