跨国金融原理(第三版)教师手册M21_MOFF9242_03_IM_C.pdf

Chapter 21 Multinational Tax Management 1.Tax Morality a.What is meant by the term“tax morality?”The multinational enterprise(MNE)faces not only a morass of foreign taxes but also an ethical question.In many countries taxpayers,corporate or individual,do not voluntarily comply with the tax laws.Smaller domestic firms and individuals are the chief violators.The MNE must decide whether to follow a practice of full disclosure to tax authorities or adopt the philosophy,“When in Rome,do as the Romans do.”Given the local prominence of most foreign subsidiaries and the political sensitivity of their position,most MNEs follow the full disclosure practice.Some firms,however,believe that their competitive position would be eroded if they did not avoid taxes to the same extent as their domestic competitors.There is obviously no prescriptive answer to the problem,since business ethics are partly a function of cultural heritage and historical development.b.Your company has a subsidiary in Russia,where tax evasion is a fine art.Discuss whether you should comply fully with Russian tax laws or should violate the laws as do your local competitors.Discussion question.2.Tax Neutrality a.Define the term“tax neutrality.”When a government decides to levy a tax,it must consider not only the potential revenue from the tax,or how efficiently it can be collected,but also the effect the proposed tax can have on private economic behavior.For example,the U.S.governments policy on taxation of foreign-source income does not have as a single objective the raising of revenue.b.What is the difference between domestic neutrality and foreign neutrality?One way to view neutrality is to require that the burden of taxation on each dollar,euro,pound,or yen of profit earned in home country operations by a MNE be equal to the burden of taxation on each currency equivalent of profit earned by the same firm in its foreign operations.This is called domestic neutrality.A second way to view neutrality is to require that the tax burden on each foreign subsidiary of the firm be equal to the tax burden on its competitors in the same country.This is called foreign neutrality.The latter policy is often supported by MNEs because it focuses more on the competitiveness of the individual firm in individual country markets.c.What are a countrys objectives when determining tax policy on foreign source income?The ideal tax should not only raise revenue efficiently but also have as few negative effects on economic behavior as possible.Some theorists argue that the ideal tax should be completely neutral in its effect on private decisions and completely equitable among taxpayers.However,other theorists claim that national policy objectives such as balance of payments or investment in developing countries should be encouraged through an active tax incentive policy.Most tax systems compromise between these two viewpoints.Chapter 21 Multinational Tax Management 99 3.Worldwide versus Territorial Approach.Nations typically structure their tax systems along one of two basic approaches:the worldwide approach or the territorial approach.Explain these two approaches and how they differ from each other.The worldwide approach,also referred to as the residential or national approach,levies taxes on the income earned by firms that are incorporated in the host country,regardless of where the income was earned(domestically or abroad).A MNE earning income both at home and abroad would therefore find its worldwide income taxed by its home country tax authorities.For example,a country like the United States taxes the income earned by firms based in the United States regardless of whether the income earned by the firm is domestic or foreign in origin.In the case of the United States,ordinary foreign-sourced income is taxed only as remitted to the parent firm.As with all questions of tax,however,numerous conditions and exceptions exist.The primary problem is that this approach does not address the income earned by foreign firms operating within the United States.Countries like the United States then apply the principle of territorial taxation to foreign firms within their legal jurisdiction,taxing all income earned by foreign firms in their borders as well.The territorial approach,also termed the source approach,focuses on the income earned by firms within the legal jurisdiction of the host country,not on the country of firm incorporation.Countries like Germany that follow the territorial approach apply taxes equally to foreign or domestic firms on income earned within the country,but in principle not on income earned outside the country.The territorial approach,like the worldwide approach,results in a major gap in coverage if resident firms earn income outside the country but are not taxed by the country in which the profits are earned.In this case,tax authorities extend tax coverage to income earned abroad if it is not currently covered by foreign tax jurisdictions.Once again,a mix of the two tax approaches is necessary for full coverage of income.4.Tax Deferral a.What is meant by the term“tax deferral?”If the worldwide approach to international taxation were followed to the letter,it would end the tax-deferral privilege for many MNEs.Foreign subsidiaries of MNEs pay host country corporate income taxes,but many parent countries defer claiming additional income taxes on that foreign-source income until it is remitted to the parent firm.b.Why do countries allow tax deferral on foreign-source income?For example,U.S.corporate income taxes on some types of foreign-source income of U.S.-owned subsidiaries incorporated abroad are deferred until the earnings are remitted to the U.S.parent.However,the ability to defer corporate income taxes is highly restricted and has been the subject of many tax law changes in the past three decades.5.Tax Treaties a.What is a bilateral tax treaty?A network of bilateral tax treaties,many of which are modeled after one proposed by the organization for economic cooperation and development(OECD),provides a means of reducing double taxation.b.What is the purpose of a bilateral tax treaty?Tax treaties normally define whether taxes are to be imposed on income earned in one country by the nationals of another,and if so,how.Tax treaties are bilateral,with the two signatories specifying what rates are applicable to which types of income between themselves alone.c.What policies do most tax treaties cover?The individual bilateral tax jurisdictions as specified through tax treaties are particularly important for firms that are primarily exporting to another country rather than doing business there through a“permanent establishment.”The latter would be the case for manufacturing operations.A firm that only exports would not want any of its other worldwide income taxed by the importing country.Tax treaties define what is a“permanent establishment”and what constitutes a limited presence for tax purposes.100 Moffett/Stonehill/Eiteman Fundamentals of Multinational Finance,Third Edition Tax treaties typically result in reduced withholding tax rates between the two signatory countries,the negotiation of the treaty itself serving as a forum for opening and expanding business relationships between the two countries.This practice is important both to MNEs operating through foreign subsidiaries,earning active income,and to individual portfolio investors who are simply receiving passive income in the form of dividends,interest,or royalties.6.Tax Types.Taxes are classified on the basis of whether they are applied directly to income,called direct taxes,or to some other measurable performance characteristic of the firm,called indirect taxes.Classify each of the following types of taxes as being“direct”or“indirect”or something else.Identify each of the following as a“direct tax,”an“indirect tax,”or something else.a.Corporate income tax paid by a Japanese subsidiary on its operating incomeDirect Tax.b.Royalties paid to Saudi Arabia for oil extracted and shipped to world marketsTechnically not a tax,but in fact similar to a Direct Tax.c.Interest received by a U.S.parent on bank deposits held in a London Bank.Any tax on such interest would be a Direct Tax.d.Interest received by a U.S.parent on a loan to a subsidiary in MexicoDirect Tax.e.Principal repayment received by a U.S.parent from Belgium on a loan to a wholly-owned subsidiary in Belgiumnot a Tax.f.Excise tax paid on cigarettes manufactured and sold within the United StatesIndirect Tax.g.Property taxes paid on the corporate headquarters building in SeattleIndirect Tax.h.A direct contribution to the International Committee of the Red Cross for refugee relief not a Tax.i.Deferred income tax,shown as a deduction on the U.S.parents consolidated income stateDirect Tax.j.Withholding taxes withheld by Germany on dividends paid to a United Kingdom parent corporationDirect Tax.7.Foreign Tax Credit.What is a foreign tax credit?Why do countries give credit for taxes paid on foreign source income?To prevent double taxation of the same income,most countries grant a foreign tax credit for income taxes paid to the host country.Countries differ on how they calculate the foreign tax credit and what kinds of limitations they place on the total amount claimed.Normally,foreign tax credits are also available for withholding taxes paid to other countries on dividends,royalties,interest,and other income remitted to the parent.The value-added tax and other sales taxes are not eligible for a foreign tax credit but are typically deductible from pretax income as an expense.A tax credit is a direct reduction of taxes that would otherwise be due and payable.It differs from a deductible expense,which is an expense the taxpayer uses to reduce taxable income before the tax rate is applied.A$100 tax credit reduces taxes payable by the full$100,whereas a$100 deductible expense reduces taxable income by$100 and taxes payable by$100 t,where t is the tax rate.Tax credits are more valuable on a dollar-for-dollar basis than are deductible expenses.Chapter 21 Multinational Tax Management 101 8.Value-Added Tax a.What is a value-added tax?The value added tax is in effect a sales tax on the value added at every step of the production and distribution process,adjusted so that the tax is not cumulative;that is,a later stage of production does not pay tax on taxes already levied at earlier stages.b.What are the advantages and disadvantages of a value-added tax?The advantages of the value-added tax include:(1)it is probably more neutral in its effect on economic decisions;(2)the populace is generally more aware that they are paying the tax;and(3)it can be rebated in the case of exports.The latter“advantage”puts countries using the value-added tax at an advantage over those that rely on income taxes on the profit from exports because income taxes cannot be rebated.c.Although the value-added tax has been proposed numerous times,the United States has never adopted one.Why do you think the United States is so negative on it when the value-added tax is widely used outside the United States?Many voters see the value-added tax as just another sales tax that is more comprehensive than the various state sales taxes it would replace.Some states have no sales tax at all so this would increase the taxes paid in those states.Overall,U.S.voters have been negative toward any new or increased tax.The sentiment now is toward reduced taxes,especially income-based taxes.9.Transfer Pricing Motivation.What is a transfer price and can a government regulate it?What difficulties and motives does a parent multinational firm face if setting transfer prices?A transfer price is the amount paid by one unit of a company(domestic or international)for goods or services purchased from another unit of the same firm.As such,a transfer price is needed for every intrafirm transaction.Where buyer and seller are in different tax jurisdictions(i.e.,countries),governments are concerned with the possibility that transfer prices are raised or lowered from a“normal”or“appropriate”level in order to avoid taxes.In most countries tax authorities have the right to declare a given international transfer price as a tax avoidance device.Such countries have the right to reset taxable income to a higher level.The motives for the parent MNE are to minimize taxes and the difficulty is that the burden of proof is on the MNE,not the tax collector,to show proof as to why a given transfer price is reasonable.10.Sister Subsidiaries.Subsidiary Alpha in Country Able faces a 40%income tax rate.Subsidiary Beta in Country Baker faces only a 20%income tax rate.At present each subsidiary imports from the other an amount of goods and services exactly equal in monetary value to what each exports to the other.This method of balancing intracompany trade was imposed by a management keen to reduce all costs,including the costs(spread between bid and ask)of foreign exchange transactions.Both subsidiaries are profitable,and both could purchase all components domestically at approximately the same prices as they are paying to their foreign sister subsidiary.Does this seem like an optimal situation to you?Each subsidiary can produce the currently traded items at approximately the same price as is being paid for the importexport transactions.Hence the only gain must come from either the avoidance of foreign exchange costs(as intended by the present firm)or from the tax effect.The foreign exchange spread is probably minimal.The tax effect suggests that the worldwide firm would be better off if income were transferred from Country Able to Country Baker.Income could be transferred from Country Able to Country Baker by having Beta,Inc.,continue to manufacture and ship to Alpha,Inc.The profit on this transaction would be taxed at only 20%,whereas if Alpha,Inc.makes the goods and includes the same implied mark-up in its international costing,Alpha,Inc.will pay more income taxes.102 Moffett/Stonehill/Eiteman Fundamentals of Multinational Finance,Third Edition 11.Correct Pricing.Section 482 of the U.S.Internal Revenue Code specifies use of a“correct”transfer price,and the burden of proof that the transfer price is“correct”lies with the company.What guidelines exist for determining the proper transfer price?A“correct price,”according to the internal revenue service(IRS),is one that best reflects an arms length transaction;that is,what price one would charge if selling to a completely unrelated buyer.Within this definition are three possibilities,ranked in order of desirability:a.Comparable uncontrolled pricebeing the same price as for a bona fide sale of the same item to an unrelated buyer.b.Resale price methodin which the final selling price of similar items to unrelated independent purchasers becomes a base from which an appropriate markup for costs and profit is calculated.The resulting net markup is then used as the appropriate transfer price for similar but not nec