gray, salter & radebaugh chapter 6 global accounting and control: a managerial emphasis sidney...

Gray, Salter & Radebaugh Chapter 6

GLOBAL ACCOUNTING AND CONTROL: A MANAGERIAL EMPHASIS

Sidney J. Gray, University of New South Wales

Stephen B. Salter, University of Cincinnati

Lee H. Radebaugh, Brigham Young University

Slides Prepared by: Jennifer Anne Salter


CHAPTER SIX

TAXATION AND THE MULTINATIONAL ENTERPRISE


INTRODUCTION

Challenges to the MNE in terms of taxation of its global operation:• Variety of taxes and types of taxable income.• Home govts. want to tax global income.

Key taxes for MNEs:• Direct taxes, e.g., corporate income taxes• Indirect taxes, e.g., Value Added Tax.


DIRECT TAXESCorporate Income Tax

Key questions:• what income is taxable?• what expenses are deductible?• what additional taxes will be charged when

dividends are paid. General corporate tax rates have been

coming down in recent years


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OECD Member Countries

EU Member Countries

DIRECT TAXESAverage Corporate Income Tax Rates - Table 6.1


DIRECT TAXESWhat Income is Taxable?

Two approaches to taxation of foreign source income: Territorial approach, e.g., Hong Kong. Only

income earned in Hong Kong should be taxed there.

Worldwide approach, e.g., U.S.. Taxes both domestic and foreign source income. Can lead to double taxation but this can be minimized through tax credits and tax treaties.


DIRECT TAXESDetermination of Expenses

The way expenses are treated for tax purposes, can cause differences in tax paid

Differences in treatment of income and expenses can result in differences between statutory and effective tax rates.


DIRECT TAXESWithholding Tax and Taxing Dividends

The income earned by a foreign subsidiary is taxable in a foreign country when cash is returned to the parent through:• dividends,

• royalties

• interest on intra company debt,

When cash is returned to parent withholding taxes are often deducted.


DIRECT TAXESWithholding Tax and Taxing Dividends

There are two approaches to taxingcorporate income: Classic System: e.g., US

• income is taxed when the corporation earns it and when dividends are received by the shareholders.

Integrated System:• tries to eliminate double taxation.


International Comparison of Effective Tax

Rate of Corporate Income Taxation


Tax Rates Around the World

CountryTaxes

VATCorporate Individual

Argentina 35% 9-35% 21%

Australia 30% 17-47% 10% GST

Austria 25% 21-50% 20% GST

Belgium 33.99% 25-50% 21%

Brazil 34% 15-27.5% 17-25%

Bulgaria 15% 10-24% 20%

Canada 36.1% 15-29% 7%

China 33% 5-45% 17%

Cyprus 10% 20-30% 15%

Czech Republic 24% 12-32% 19%

Denmark 24% 38-59% 25%

Egypt 40% 20% -

Estonia 23% 23% 18%


Tax Rates Around the World

CountryTaxes

VATCorporate Individual

Finland 26% 9-32.5% 22%

France 33.33% 10-48% 19.6%

Germany 25% 15-42% 16%

Greece 22-29% 0-40% 19%

Hong Kong 17.5% 16-20% -

Hungary 16% 18-38% 20%

India 30-40% 10-30% 12.5%

Indonesia 30% 5-35% 10%

Ireland 12.5% 20-42% 21%

Israel 31% 10-49% 15.5%

Italy 33% 23-43% 20%

Japan 30% 10-37% 5%

Latvia 15% 25% 18%


Tax Rates Around the WorldCountry

TaxesVAT

Corporate Individual

Lithuania 15% 10-35% 18%

Luxemburg 30% 6-39% 15%

Malta 35% 15-35% 18%

Mexico 29% 3-29% 15%

Monaco 33% 0% 19.6%

Morocco 35% 0-41.5% 20%

Montenegro 15-20% 0-24% 17%

Netherlands 29.6% 0-52% 19%

New Zealand 33% 0-39% 12.5% GST

Norway 28% 28-51.3% 25%

Pakistan 35% 7.5-35% 15%

Philippines 35% 5-32% 10%

Poland 19% 19-40% 22%

Portugal 27.5% 10.5-40% 21%

Romania 16% 16% 19%


Tax Rates Around the WorldCountry

TaxesVAT

Corporate Individual

Russia 24% 13% 18%

Saudi Arabia 20% 20% -

Serbia 10% 10-14% 18%

Singapore 20% 3.75-21% 5%

Slovakia 19% 19% 19%

Slovenia 25% 16-50% 20%

South Africa 39% 18-40% 14%

Spain 35% 15-45% 16%

Taiwan 25% 6-40% 5%

Thailand 30% 5-37% 7%

Turkey 20% 15-35% 18%

U.K. 30% 0-40% 17.5%

U.S.A. 35% 0-35% -

Vietnam 28% 0-40% 10%

Zambia 35% 10-30% 17.5%


International Comparison of Individual Income Taxes


International Comparison of Effective Tax Rates for a couple with two children


INDIRECT TAXESValue Added, Goods and Services Tax

Examples of indirect taxes:• consumption taxes (sales tax), • VAT, • excise tax, • estate tax, • gift tax, • employment tax, • user fees.

In Europe, VAT is a considerable source of revenue. • tax applied at each stage of production for the value added to

the goods. • tax burden eventually falls on the consumer because

companies can reclaim taxes paid.


INDIRECT TAXESValue Added, Goods and Services Tax - Table 6.2

Calculation Manufacturer Wholesaler Retailer Consumer

Net cost of goods £10.00 £10.00 £14.00 £23.50

Markup £4.00 £6.00

Net selling price £10.00 £14.00 £20.00

VAT @ 17.5% £1.75 £2.45 £3.50

Gross selling price £11.75 £16.45 £23.50

Accounting for VAT: Total

VAT paid £1.75 £2.45 £3.50 £7.70

VAT recoverable £0.00 £1.75 £2.45 £4.20

Net VAT paid £1.75 £0.70 £1.05 £3.50


Value-added Tax Rate in Various Countries


AVOIDANCE OF DOUBLE TAXATION OF FOREIGN SOURCE INCOME

Credits and Deductions: When subsidiaries are based in a country

which uses a worldwide approach to taxation, income may be taxed twice:• when earnings are realized in the foreign location

• when earnings are realized in the parent country.

This is double taxation



For income earned outside the country, most developed countries offer credits to offset the foreign tax paid

In the US, taxes paid on foreign income:• can be treated as a credit applied against tax

liability• can be deducted from income to reduce

taxable income.


AVOIDANCE OF DOUBLE TAXATION OF

FOREIGN SOURCE INCOME - Table 3

Double Taxation

Tax

Deduction

Tax

Credit

Income earned by foreign corp. $100.00 $100.00 $100.00

Foreign tax @ 30% 30.00 30.00 30.00

Net income after foreign taxes $70.00 $70.00 $70.00

US Tax @ 35% on $100 35.00

US Tax @ 35% on $70 24.50

US Tax @ 35% on $100 less $30 5.00

Net income after US taxes $35.00 $45.50 $65.00

Effective tax rate 65% 54.5% 35%



Foreign Tax Credit (FTC) Limitation Corporation's FTC is equal to the percentage

of its US tax laibility that results from its foreign source taxable income being included in its total US taxable income

Amount of FTC = US taxes before FTC times (taxable income from foreign sources/total worldwide taxable income)

Amount of FTC cannot exceed amount of foreign taxes paid during year



Tax Treaties:• can specify that certain classes of income

would not be taxable;• can reduce the rate on income and/or

withholding taxes;• can specifically deal with the issue of tax

credits


MINIMIZING GLOBAL TAXTax Havens

Is a “place where foreigners may receive income or own assets without paying high rates of tax.”

can offer low taxes or no taxes on certain classes of income


MINIMIZING GLOBAL TAXTax Havens

Examples of tax havens:• No Income Taxes - Bahamas, Bermuda,

Cayman Islands.• Low Tax Rates - British Virgin Islands• Exempt foreign source income - Panama,

Hong Kong.


MINIMIZING GLOBAL TAXTax Incentives

There are two major types of tax incentives. tax holidays

• given by countries to attract foreign investors

export incentives• given by countries to encourage exports of

goods and services


MINIMIZING GLOBAL TAXThe Controlled Foreign Corporation

A US corporation may choose to produce or sell in a foreign country through a branch or foreign corporation.

US parent does not have to pay US tax on income from a subsidiary until it receives a dividend. This is called deferral.


MINIMIZING GLOBAL TAXThe Controlled Foreign Corporation

An exception to the deferral is given if:• US shareholders hold more than 50% of a

controlled foreign corporation (CFC). A foreign company owned by US citizens

is deemed to be a CFC. Its passive income is taxable in the US,

regardless of whether a dividend has been paid.


TAX DIMENSIONS OF EXPATRIATES

Most countries tax earnings of their residents.

The US taxes the worldwide income of its citizens.

The US does provide some relief if you have been resident outside the US for a certain uninterrupted period.


INTRACORPORATE TRANSFER PRICING

This is also known as transfer or internal pricing.

Refers to the pricing of goods and services bought and sold between members of a corporate family.

Includes transfers of raw materials, semi or finished goods, loans, fees, etc..


INTRACORPORATE TRANSFER PRICING - Example

German subsidiary of US parent company manufactures goods and sells them to its Irish subsidiary that then sells them back to the US parent company. Why?

Goods cost German subsidiary $80/unit and were sold to Irish subsidiary for $80/unit German tax rate – 45% German taxable income $80 – 80 = $0/unit German income taxes $0 * 45% = $0/unit Goods cost Irish subsidiary $80/unit and were sold to US parent company for $150/unit Irish tax rate - 4% Irish taxable income $150 – 80 = $70/unit Irish income taxes $70 * 4% = $2.80/unit Goods cost US parent company $150/unit and were sold for $150/unit US tax rate – 35% US parent company taxable income $150 – 150 = $0/unit US parent company income taxes $0 * 35% = $0/unit Total income taxes paid $2.80/unit If German subsidiary sold goods directly to US parent company for $150/unit, German

subsidiary would have had taxable income of $70 and paid income taxes of $31.50/unit ($70 * 45%)


TAX PLANNING IN THE INTERNATIONAL ENVIRONMENT

There are several ways in which a firm can

choose to service its foreign markets: exports of goods and services; foreign branches; foreign subsidiaries; location of foreign operations.


TAX PLANNING ……Exports

Should products be serviced from the parent country or foreign location?

What are the benefits:• Can use the Foreign Sales Corporation (FSC) which

allows:– substantial tax benefits if operations are

legitimate– setting up in a tax haven country to shelter

income. Be aware of withholding taxes and treaties..


TAX PLANNING ……Foreign Branches

There are benefits to operating abroad: Branch profits/losses not subject to

deferral so beneficial during initial years which are normally loss years.

Can offset home office income for tax purposes.

Branch remittances usually not subject to withholding taxes (subsidiaries are).).


TAX PLANNING ……Foreign Subsidiaries

Major benefit is that income is usually

sheltered from taxation in the home

country until a dividend is remitted.


TAX PLANNING ……Location of Foreign Operations

Influenced by three major tax factors: Tax incentives

• can materially reduce the cash outflow for an investment project

Tax rates• have competent tax and legal help in local country.

Tax treaties• can help choose location of legal operations.

gray, salter & radebaugh chapter 6 global accounting and control: a managerial emphasis sidney...

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salter radebaugh chapter

direct taxes withholding

key taxes

global income

variety of taxes

additional taxes

taxing corporate income

tax purposes