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1、Chapter 17Taxes&Multinational Corporate Strategy,17.1The Objectives of National Tax Systems17.2Types of Taxation17.3U.S.Taxation of Foreign-Source Income17.4Taxes and Organizational Form17.5Transfer Pricing and Tax Planning17.6Taxes and the Location of Foreign Operations17.7Taxes and Cross-Border Me
2、rgers and Acquisitions17.8Summary,The income tax.,The income tax has made more liarsout of the American peoplethan golf has.Will Rogers,The objectives of tax neutrality,Domestic tax neutrality-incomes arising from domestic and foreign operations are taxed similarly by the domestic governmentForeign
3、tax neutrality-taxes imposed on the foreign operations of domestic firms are the same as those facing local competitors in the host countries,Violations of tax neutrality,Taxes vary on income from different sourcesTax jurisdictions:foreign or domesticOrganizational forms:foreign branches or incorpor
4、ated subsidiariesAsset classes:interest,dividends,or capital gainsFinancing instruments:tax deductibility of interest on debt,Forms of taxation,Explicit taxesCorporate and personal income taxesWithholding taxes on dividends,interest and royaltiesSales or value-added taxesProperty or asset taxesTarif
5、fs on cross-border trade,Forms of taxation,Implicit taxesThe law of one price in after-tax form“Equivalent assets sell for the same after-tax expected return”Countries with low tax rates tend to have low before-tax expected and required returns,The effect of implicit taxes on required returns,Exampl
6、eCountry fTf=50%and if=20%yield a return of if(1 Tf)=20%(1-0.5)=10%after-taxCountry dIf Td=20%,what is id in equilibrium?,The effect of implicit taxes on required returns,Equal after-tax returns meansif(1-Tf)=id(1-Td)20%(1-0.5)=id(1-0.2)=10%id=10%/(1-0.2)=12.5%A 20%return at a 50%tax rate is equival
7、ent to a 12.5%after-tax return at a 20%tax rate.,Taxes on foreign-source income,Two basic types of taxation systemsA worldwide tax system taxes foreign-source income as it is repatriated to the parent company.A territorial tax system levies a tax only on domestic income.Taxes on foreign-source incom
8、e are only paid in the country in which they are earned.,U.S.taxation of foreign source income,In the worldwide tax system of the United States income from foreign subsidiaries is taxed as it is repatriated to the parentincome from foreign branches is taxed as it is earned,The organizational formof
9、foreign operations,Most manufacturing firms conduct their foreign operations through foreign subsidiariesIncorporation in the host country limits the parents liabilityIncorporation avoids host country disclosure requirements on the parents worldwide operationsForeign branches can be used for start-u
10、p operations that are initially expected to lose money,The organizational formof foreign operations,Foreign branches are sometimes used by financial institutionsAdvantageForeign tax credit(FTC)limitations can be less binding for foreign branches than for foreign subsidiariesDisadvantagesForeign bran
11、ches can be tax disadvantaged if the foreign branch is in a low-tax countryForeign branches can expose the MNC to legal liabilities,FTC limitations in the U.S.,Tax statements as single subsidiariesCanadaIsraelItalyaDividend payout ratio(%)100100100bForeign div withholding rate(%)555cForeign tax rate
12、(%)263640dForeign income before tax($s)100010001000eForeign income tax(d*c)260360400fAfter-tax foreign earnings(d-e)740640600gDeclared as dividends(f*a)740640600hForeign div withholding tax(g*b)373230iTotal foreign tax(e+h)297392430jDividend to U.S.parent(d-i)703608570,FTC limitations in the U.S.,Ta
13、x statements as single subsidiaries(continued)IrelandItalyFrancekGross foreign inc before tax(d)100010001000lTentative US tax(k*35%)350350350mFTC-Foreign tax credit(i)297392430nNet US tax payable(MAXl-m,0)5300oTotal taxes paid(i+n)350392430pNet amount to U.S.parent(k-o)650608570qTotal taxes separate
14、ly(So)$1,172,FTC limitations in the U.S.,Parents consolidated tax statementrOverall FTC limitation(Sk*35%)$1,050 sTotal consolidated FTCs(Si)$1,119 tAdditional U.S.taxes due(MAX0,r-s)$0 uExcess FTCs(MAX0,s-r)$69(carried back 2 years or forward 5 years)Overall FTC limitation=(total foreign-source inc
15、ome)(U.S.tax rate),Income basketsActive incomePassive incomeOther(e.g.,income from foreign sales corporations),Additional FTC limitations,Income basketsSubpart F income a passive income basketForeign subsidiaries owned more than 10 percent(e.g.controlled foreign corporations,or CFCs)Foreign holding
16、company incomeForeign base company sales or service income,Additional FTC limitations,Income basketsSubpart F incomeIncome and expense allocation Allocation of interest expenseAllocation of R&D expenseAllocation of other expenses,Additional FTC limitations,Effect of shifting sales to low-tax countri
17、es,Tax statements as single subsidiariesCanadaIsraelItalyaDividend payout ratio(%)100100100bForeign div withholding rate(%)555cForeign tax rate(%)263640dForeign income before tax($s)200010000eForeign income tax(d*c)520360 0fAfter-tax foreign earnings(d-e)14806400gDeclared as dividends(f*a)14806400hF
18、oreign div withholding tax(g*b)7432 0iTotal foreign tax(e+h)594392 0jDividend to U.S.parent(d-i)14066080,Effect of shifting sales to low-tax countries,Tax statements as single subsidiaries(continued)CanadaIsraelItalykGross foreign inc before tax(d)200010001000lTentative US tax(k*35%)700350(0)mFTC-Fo
19、reign tax credit(i)5943920nNet US tax payable(MAXl-m,0)106 0(0)oTotal taxes paid(i+n)700392(0)pNet amount to U.S.parent(k-o)13006080qTotal taxes separately(So)($1092),Parents consolidated tax statementOriginalShiftedrOverall FTC limitation(Sk*35%)$1,050$1,050sTotal consolidated FTCs(Si)$1,119$986tAd
20、ditional U.S.taxes due(MAX0,r-s)$0$64uExcess FTCs(MAX0,s-r)$69$0(carried back 2 years or forward 5 years)Overall FTC limitation=(total foreign-source income)(U.S.tax rate),Effect of shifting sales to low-tax countries,Offshore finance subsidiaries,The Tax Reform Act of 1986 removed the tax advantage
21、s for U.S.firms of tax-haven affiliatesMany MNCs retain off-shore finance subsidiaries as reinvoicing centersReinvoicing centers should be in countries withDeveloped infrastructure including banking,transportation,and communication facilitiesA stable and convertible currency with access to the inter
22、national currency and Eurocurrency marketsLow tax rates(income and withholding)Low political risk,Transfer pricing and tax planning,MNCs have a tax incentive toShift revenues to low-tax countriesShift expenses to high-tax countriesMost national and international tax codes require that transfer price
23、s be set as if they are arms-length transactions between unrelated parties,An example of the games people playA U.S.-based MNC produces beef in Argentina for export to HungaryRevenues are$10,000 in HungaryProduction expense is$3,000 in Argentina$1,000 of fixed expense in each countryThe income tax r
24、ate in Argentina is 35%The income tax rate in Hungary is 18%At what price should the transfer from Argentina to Hungary be made?,Transfer pricing and tax planning,Transfer price Market-based Cost-plusArgHunBothArgHunBoth Tax rate35%18%35%18%Revenue 8000100001000050001000010000COGS300080003000 3000 5
25、0003000Other expenses1000 1000 2000 1000 1000 2000Taxable income400010005000100040005000Total taxes paid1400180 1580 350 720 1070Net income2600820342065032803930Effective tax rate31.6%21.4%on foreign operations,Transfer pricing and tax planning,Transfer pricing and tax planning,Aggressive transfer p
26、ricing can be advantageous when a firm hasOperations in more than one tax jurisdictionHigh gross operating margins(such as in electronics and pharmaceuticals)Intangible assets resulting in intermediate or final products for which there is no market price(e.g.,patents or proprietary production processes),MNC competitive position relative to foreign competitors,unattractive,attractive,neutral,neutral,Host country tax rateLowHigh,Taxstatusof USbuyer,Excess FTCs,No excess FTCs,
