1. 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
Gray, Salter & Radebaugh Chapter 6

2. TAXATION AND THE MULTINATIONAL ENTERPRISE
CHAPTER SIX
TAXATION AND THE MULTINATIONAL ENTERPRISE
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3. Gray, Salter & Radebaugh Chapter 6
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.
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4. DIRECT TAXES Corporate 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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5. DIRECT TAXES Average Corporate Income Tax Rates - Table 6.1
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6. Gray, Salter & Radebaugh Chapter 6

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8. DIRECT TAXES What 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.
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9. DIRECT TAXES Determination 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.
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10. DIRECT TAXES Withholding 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.
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11. DIRECT TAXES Withholding Tax and Taxing Dividends
There are two approaches to taxing
corporate 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.
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12. Gray, Salter & Radebaugh Chapter 6
International Comparison of Effective Tax Rate of Corporate Income Taxation
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13. Tax Rates Around the World
Country
Taxes
VAT
Corporate
Individual
Argentina
35%
9-35%
21%
Australia
30%
17-47%
10% GST
Austria
25%
21-50%
20% GST
Belgium
33.99%
25-50%
Brazil
34% %
17-25%
Bulgaria
15%
10-24%
20%
Canada
36.1%
15-29% 7%
China
33%
5-45%
17%
Cyprus
10%
20-30%
Czech Republic
24%
12-32%
19%
Denmark
38-59%
Egypt
40% -
Estonia
23%
18%
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14. Tax Rates Around the World
Country
Taxes
VAT
Corporate
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
18-38%
20%
India
30-40%
10-30%
12.5%
Indonesia
30%
5-35%
10%
Ireland
20-42%
21%
Israel
31%
10-49%
15.5%
Italy
33%
23-43%
Japan
10-37% 5%
Latvia
15%
18%
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15. Tax Rates Around the World
Country
Taxes
VAT
Corporate
Individual
Lithuania
15%
10-35%
18%
Luxemburg
30%
6-39%
Malta
35%
15-35%
Mexico
29%
3-29%
Monaco
33% 0%
19.6%
Morocco
0-41.5%
20%
Montenegro
15-20%
0-24%
17%
Netherlands
29.6%
0-52%
19%
New Zealand
0-39%
12.5% GST
Norway
28% %
25%
Pakistan
7.5-35%
Philippines
5-32%
10%
Poland
19-40%
22%
Portugal
27.5% %
21%
Romania
16%
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16. Tax Rates Around the World
Country
Taxes
VAT
Corporate
Individual
Russia
24%
13%
18%
Saudi Arabia
20% -
Serbia
10%
10-14%
Singapore % 5%
Slovakia
19%
Slovenia
25%
16-50%
South Africa
39%
18-40%
14%
Spain
35%
15-45%
16%
Taiwan
6-40%
Thailand
30%
5-37% 7%
Turkey
15-35%
U.K.
0-40%
17.5%
U.S.A.
0-35%
Vietnam
28%
Zambia
10-30%
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17. International Comparison of Individual Income Taxes
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18. Gray, Salter & Radebaugh Chapter 6
International Comparison of Effective Tax Rates for a couple with two children
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19. INDIRECT TAXES Value 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.
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20. INDIRECT TAXES Value Added, Goods and Services Tax - Table 6.2
Calculation
Manufacturer
Wholesaler
Retailer
Consumer
Net cost of goods
£10.00
£14.00
£23.50
Markup
£4.00
£6.00
Net selling price
£20.00
17.5%
£1.75
£2.45
£3.50
Gross selling price
£11.75
£16.45
Accounting for VAT:
Total
VAT paid
£7.70
VAT recoverable
£0.00
£4.20
Net VAT paid
£0.70
£1.05
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21. Value-added Tax Rate in Various Countries
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22. 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
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23. AVOIDANCE OF DOUBLE TAXATION OF FOREIGN SOURCE INCOME
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.
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24. AVOIDANCE OF DOUBLE TAXATION OF FOREIGN SOURCE INCOME - Table 3
Deduction
Credit
Income earned by foreign corp.
$100.00
Foreign 30%
30.00
Net income after foreign taxes
$70.00
US 35% on $100
35.00
US 35% on $70
24.50
US 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%
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25. AVOIDANCE OF DOUBLE TAXATION OF FOREIGN SOURCE INCOME
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
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26. AVOIDANCE OF DOUBLE TAXATION OF FOREIGN SOURCE INCOME
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
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27. MINIMIZING GLOBAL TAX Tax 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
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28. MINIMIZING GLOBAL TAX Tax 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.
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29. MINIMIZING GLOBAL TAX Tax 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
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30. MINIMIZING GLOBAL TAX The 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.
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31. MINIMIZING GLOBAL TAX The 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.
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32. 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.
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33. 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.
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34. 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%)
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35. 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.
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36. 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.
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37. 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).
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38. TAX PLANNING …… Foreign Subsidiaries
Major benefit is that income is usually
sheltered from taxation in the home
country until a dividend is remitted.
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39. 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.
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