International Accounting

Accounting Standards Important Note – Most countries use different accounting systems. Therefore – Accounting numbers are not comparable across countries without a great deal of correction

Accounting Systems in a Multinational Most companies keep several sets of books including: Tax Accounting System – Unique to each country Public Accounting System – Unique elements in each country Managerial Accounting System – Hopefully consistent across company

Accounting Standards US – FASB and GAAP – “moving towards” IASB

Accounting Standards Many others – Variations of IASB

Accounting Systems Vary Because of:

Accounting Systems Vary Because of Political and economic ties with other countries

Accounting Systems Vary Because of Relationships between businesses and providers of capital

Accounting Systems Vary Because of Levels of inflation

Accounting Systems Vary Because of National culture – optimism vs conservatism

Accounting Systems Vary Because of Level of economic development

International Financial Management

Financial System Must Consider Political risks Variations in sources of funding Foreign exchange rate fluctuations Restrictions on capital, exchange and profit flows Differences in tax systems faced Variations in economic systems and economic conditions Differences in inflation Varying interest and discount rates

How Much Profits Should You Bring Home? Remittance Strategy

How Much Profits Should You Bring Home? Opportunities for growth outside country profits earned in

How Much Profits Should You Bring Home? Firms objectives

How Much Profits Should You Bring Home? Availability of capital from local sources

How Much Profits Should You Bring Home? Stability of currency exchange

How Much Profits Should You Bring Home? Economic and political conditions at home and abroad

How Much Profits Should You Bring Home? Host government restrictions on remittance

How Much Profits Should You Bring Home? Tax systems in host and home country

How Much Profits Should You Bring Home? Impact on image in host country

Remittance Accomplished Through

Remittance Accomplished Through Germany US $100 Subcomponent Cost $20 Labor $30 Admin cost___________ $150 Sell to US $50 Value added__________ $12.50 25% Value Added Tax on $50 $150 Cost of goods sold $50 Marketing and admin cost $200 total cost $250 Sale Price____________ $50 profit $17.50 35% Income Tax $30 total tax paid on $250 TV sale Transfer pricing (1)

Remittance Accomplished Through Germany Bermuda US $100 Subcomponent Cost $20 Labor $30 Admin cost_______ $100 Sell to Bahamas $0 Value added_______ $0 Value Added Tax $100 Subcomponent Cost $5 Labor_________ $105 Total cost $200 Sell to US_____ $95 Profit No VAT or Income Tax $0 Taxs $200 Cost of goods sold $50 Marketing and admin cost $250 total cost $250 Sale Price____________ $0 profit $0 Income Tax $0 total tax paid on $250 TV sale Transfer pricing (2)

Remittance Accomplished Through ACME US ACME Venezuela $1m Startup Funding $100,000 Profits a year $50,000 50% Income Tax Venezuela blocks remittance Swaps (1)

Remittance Accomplished Through ACME US ACME Venezuela Mega Bank International $1m Deposit earning 9.5% $1m loan charging 10% $1m loan paying 10% $100,000 interest payment eliminates profit – no taxes, no remittance problem $95,000 “interest payment” Keeps .5% profit Swaps (2)

Remittance Accomplished Through Italian Factory US Corporate Office $1m “surprise” profits Pays 35% VAT Provides accounting, Management and design consulting as part of corporate services Unbundling (1)

Remittance Accomplished Through Italian Factory US Corporate Office $1m charge for corporate service No profits – No VAT $1m profit on charge to Italy No income or VAT Tax Assigns corporate office personnel to Bahamas division Unbundling (2)

Types of International Cash Flows

Types of International Cash Flows Intracompany Netting - Cancelling inflows and outputs to reduce transactions

Types of International Cash Flows Intracompany Pooling - Pooling all funds in subsidiary with best tax laws or security

Types of International Cash Flows Intercompany Prevent other companies leading and lagging

Types of International Cash Flows Intercompany Minimize currency exchange transaction costs