Page 264 - DMGT514_MANAGEMENT_CONTROL_SYSTEMS
P. 264

Unit 14: Management Control of MNC’s




          source  income derived from a minority foreign subsidiary is normally taxed  to the  parent  Notes
          company only when remitted to the parental through the dividend route. A foreign subsidiary
          in which the parent owns more than 50% of voting equity is a controlled corporation. Active
          foreign source income from a controlled  foreign subsidiary  is taxed only as remitted to the
          parent but passive income whether to be taxed or not depends upon the tax laws of the parent
          home country.

               !

             Caution  The management of an MNC must be aware of any differences in the taxation of
             income by a particular host country when deciding whether to organise a foreign operation
             as a branch or subsidiary.


                 Example:  New  foreign affiliates  experience  operating  losses  in  the  early years  of
          operation. In such a situation, it may be beneficial for the MNC to organise overseas operations
          initially, as a foreign branch of the parent because branch’s operating losses are consolidated
          with the parent company’s earnings for tax purposes.
          In a  situation where  foreign source  income is to be  re-invested  abroad  to expand  foreign
          operations, it may be preferable to organise it as a minority foreign subsidiary if the foreign
          income tax is less than the home country of the parent because the tax liability of the parent can
          be deferred until the subsidiary remits dividend to the parent.




              Task  Japanese MNCs such as Toyota, Toshiba and Matsushita made extensive investment
             in South East Asian countries like Thailand, Malaysia, Indonesia and India. In your opinion,
             what forces are driving Japanese investments in these regions?
          14.3 Transfer Pricing – Payments to and from Foreign Affiliates


          MNCs in order to minimise their global tax liability, can have suitable transfer pricing strategies.
          Transfer price is an accounting value assigned to a good or service transferred from one affiliate
          to another. With higher transfer price, the larger will be the gross profit of the transferring
          division relative to the receiving division. Consequently, it is beneficial to follow a high mark-
          up policy on transferred goods and services from the parent to a foreign  affiliate when the
          income tax rate in the host country is greater than the tax rate in the parent company because of
          lower taxable income in the high-tax cost country. On the other hand, when the parent company
          has a higher tax rate, a low mark up policy will enable higher taxable income in the host country
          and corresponding higher dividend remittance, which again will bear the high tax rate. However,
          if foreign source retained earnings were needed for re-investment in the host country, a low
          mark-up policy would result in tax savings (assuming that undistributed profits are not subject
          to high tax in the host country).

          Government authorities are quite aware of transfer pricing schemes used by MNCs to reduce
          their worldwide tax liability and most countries have regulations, controlling transfer prices.
          These regulations state that the transfer price must reflect an arm’s-length price i.e., a price, the
          selling affiliate would charge to an unrelated customer for similar goods or services. However,
          an  arm’s-length price is difficult to establish and evaluate, thus, there exists opportunity  for
          some argument by an MNC to use transfer pricing strategies to reduce its worldwide tax liability.








                                           LOVELY PROFESSIONAL UNIVERSITY                                   259
   259   260   261   262   263   264   265   266   267   268   269