Page 261 - DMGT514_MANAGEMENT_CONTROL_SYSTEMS

Management Control Systems

Notes Objectives

After studying this unit, you will be able to:
 Recognize the international taxation

 Explain the transfer pricing – payments to and from foreign affiliates
 Discuss the control strategies
 Interpret the matrix organization structure and the multinational firm
 Explain the exchange risk management

Introduction

Financial management practices for the MNC will include:

1. Why MNCs make capital expenditure in productive capacity in foreign lands, rather than
first producing domestically and then exploring overseas markets.
2. International Capital Structure and cost of capital of an MNC.

3. How to adjust the present value framework for the parent firm to analyse a capital
expenditure in foreign operations.
4. Issues in Cash Maintenance.

5. International tax environment and double taxation avoidance agreement.

14.1 International Taxation

The international tax environment is useful to multinational firms in their tax plannings and
also informative to investors in international financial assets.

14.1.1 Income Tax

Many countries in the world collect a significant portion of their tax revenue from imposing an
income tax on personal and corporate income. An income tax is a direct tax i.e., one that is paid
directly by the tax payer on whom it is levied. The tax is levied on active income that is the
income that results from production by the firm or individual or from services that have been
provided. National tax rates vary from a low of zero per cent in such tax haven countries as:
Bahrain, Bermuda, The British Virgin Islands and Cayman Islands as well as over 40 per cent in
many countries.

14.1.2 Withholding Tax

A withholding tax is a tax levied on passive income earned by an individual or corporate of one
country within the tax jurisdiction of another country. Passive income includes dividends and
interest income, and income from royalties, patents or copyright paid to the tax payer. A
withholding tax is an indirect tax, that is, a tax that is borne by a tax payer who did not directly
generate the income that serves as the source of the passive income. The tax is withheld from
payments the corporation makes to the tax payer and paid over the local tax authority. By this
method, the local tax authority assures that it has received tax due on passive income earned
within its tax jurisdiction.

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