Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. CHAPTER 18 H ost-Country Regulation: Corporate Law, Taxation, and Currency Risk

Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 2 Host- Country Corporate Law Affecting Foreign Investment Host country corporate law can impact the “bottom line”: –What is the host country does not allow repatriation of money back to foreign investor’s country? –What if employment boards are run by a majority of host-country ‘insiders’? Most countries now regulate investment to try to balance investment with local growth and control.

Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 3 Minority Ownership: Passive Investor limits herself to equity or debt financing. Equity: –American Depository Receipts certificates held by U.S. trust institution representing stock held by bank in foreign country. –EU Prospectus Directive. Legal issues: insider trading (different definitions), national legislation.

Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 4 Minority Ownership: Active Joint Venture forms: –Foreign corporation. –Foreign partnership. –U.S. corporation with foreign branch. –U.S. partnership with foreign parties. National restrictions may exist on foreign participation. –Example: U.S. restriction on foreign nationals involved in defense contractors.

Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 5 Majority Ownership and Subsidiaries Reason: Foreign company can exercise greater control, but some countries either forbid 100% foreign ownership or impose high taxes. Option: create a foreign branch subsidiary. 

Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 6 What Is the Difference Between a Subsidiary and a Branch? Control. Tax. Liability. When might you consider a branch first?

Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 7 Tax Issues: Bank of America v. U.S. Foreign tax credits - in the U.S. you get credit on U.S. income tax on foreign taxes paid. See the Bank of America Nat’l Trust & Savings Assn. v. United States case. Holding: BOA petition dismissed tax credits appeal.

Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 8 Tax Issues: E-Commerce Should the internet be a “tax free” zone? Great variation among regions: –All EU purchases subject to a VAT tax, from 15-25%. –EU treats downloadable music as a “service.” Transfer pricing - to prevent tax evasion require intercompany transactions at arms length prices.

Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 9 Tax Issues Foreign sales corporation - legal mechanism to reduce taxes. See the Compaq Computer case. U.S. Enforcement of Foreign Tax Laws. – David B. Pasquantino v. United States : Supreme Court held that Department of Justice has the power to prosecute Americans for the evasion of foreign tax laws.

Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 10 Foreign Control Issues Virtually every country prohibits foreign entities in sensitive sectors. US outlaws foreign investment in “national security” fields such as telecommunications, air transportation, and military procurement. Mexico has now changed its laws to allow up to 100% foreign investment. Investor reaction to limits has always been negative.

Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 11 Controlling Currency Risk Inconvertibility: make agreement with government regarding currency exchange results & import substitution rights. Minimizing Fluctuation Risks: Currency Swaps. Arrangements with the Soft-Currency Country. Payment and Price Adjustment Approaches.

Copyright © 2009 South-Western Legal Studies in Business, a part of South-Western Cengage Learning. 12 Controlling Currency Risk Structuring of Hard-Currency Obligations and Revenues. Countertrade. –Counterpurchase. –Barter. –Offsets. –Buy-Back. Consortia or parallel exchange.