MANAGING THE MULTINATIONAL FINANCIAL SYSTEM

GROUP 12

FATHUR GUMILANG (1210534011)

ATIKAH GALUH WILANDRA (1210534013)

DEWI FITRAH ILAHI (1210534025)

1

CHAPTER 0VERVIEW

I. THE VALUE OF THE MULTINATIONAL FINANCIAL SYSTEMII. INTERCOMPANY FUND-FLOWMECHANISMS: COSTS AND BENEFITSIII. DESIGNING A GLOBAL REMITTANCE POLICY

THE VALUE OF THE MULTINATIONAL FINANCIAL SYSTEM

A. Allows MNC to arbitrage1. Tax systems2. Financial markets3. Regulatory systems

THE VALUE OF THE MULTINATIONAL FINANCIAL SYSTEM

A. Tax Arbitrage1. Wide variations exist in global

tax systems2. Firms reduce taxes paid-move

funds to low-tax jurisdiction

THE VALUE OF THE MULTINATIONAL FINANCIAL SYSTEM

B. Financial Market Arbitrage1. Assume imperfect markets

becausea. Formal barriers to trade

existb. Informal also existc. Imperfections in domestic

capital markets exist.

THE VALUE OF THE MULTINATIONAL FINANCIAL SYSTEM

C. Regulatory Arbitrage1. Arises when subsidiary profits

vary due to local regulations.2. Example:

a. Government price controlsb. Union wage pressures, etc.

3. Firms may disguise true profits in order to gain better negotiations

INTERCOMPANY FUND-FLOWMECHANISMS: COSTS AND BENEFITS

Inter-company Fund Flows1. Tax Factors:

a. Taxes available on1.) corporate income2.) personal income

(includes dividends)

INTERCOMPANY FUND-FLOWMECHANISMS: COSTS AND BENEFITS

2. Transfer PricingPricing internally-traded goods

for the purpose of moving profits to a more tax-friendly nation.

Uses of Transfer Pricing1. Reduces taxes paid2. Reduces ad valorem tax3. Avoids exchange controls

INTERCOMPANY FUND-FLOWMECHANISMS: COSTS AND BENEFITS

3. Reinvoicing Centersa. Set up in low-tax nations.b. Center takes title to all goods.c. Center pays seller/paid by buyer

all within the MNC.d. Advantages:

1.) Easier currency changing2.) Other invoice currency,

other than local, available.

INTERCOMPANY FUND-FLOWMECHANISMS: COSTS AND BENEFITS

e. Disadvantages of Reinvoicing1.) Increased communications

costs2.) Suspicion of tax evasion by

local governments.4. Fees and Royalties

a. Firms have control of payment amounts.

b. Host governments less suspicious.

INTERCOMPANY FUND-FLOWMECHANISMS: COSTS AND BENEFITS

5. Leading and Lagginga. Highly favored by MNCsb. Value depends on opportunity costc. No need for formal debt d. Less chance of local government

suspicion.

INTERCOMPANY FUND-FLOWMECHANISMS: COSTS AND BENEFITS

6. Intercompany Loansa. Useful when following present:

1.) Credit rationing2.) Currency controls3.) Differential tax rates

INTERCOMPANY FUND-FLOWMECHANISMS: COSTS AND BENEFITS

b. Types of Inter-company Loans1) Back-to-back loans

a. Often called fronting loanb. Loan channeled through a bankc. Loans collateralized by parent

deposit. Advantages

1. protects against confiscation2. reduces taxes3. accesses blocked funds

INTERCOMPANY FUND-FLOWMECHANISMS: COSTS AND BENEFITS

2). Parallel loans: Consists of 2 related but separate loans with 4 parties

in 2 nations.

Purpose of parallel loan(1.) repatriate blocked funds(2.) avoid currency controls(3.) reduce currency exposure

INTERCOMPANY FUND-FLOWMECHANISMS: COSTS AND BENEFITS

7. Dividends: Most important method of transferring funds to parents

Tax Effects Financing Requirements Exchange Controls Joint Ventures

8. Equity versus Debt

DESIGNING A GLOBAL REMITTANCE POLICY

A. Factors:1. Number of financial links2. Volume of transactions3. Ownership patterns4. Product standardization5. Government regulations

DESIGNING A GLOBAL REMITTANCE POLICY

B. Information Requirements of a GlobalRemittance Policy-firm needs following details

1. Subsidiary financing requirements

2. Sources/costs of external capital3. Local investment yields4. Financial channels available

DESIGNING A GLOBAL REMITTANCE POLICY

B. Information Requirements (con’t)

5. Transaction volume

6. Relevant tax factors

7. Government restrictions on

transfer of funds.