Page 284 - DMGT514_MANAGEMENT_CONTROL_SYSTEMS

Unit 14: Management Control of MNC’s

Tax Haven: A tax haven country is one that has a low corporate income tax and low withholding Notes
tax rates on passive income.
Transaction Exposure: This is a measure of the sensitivity of the home currency value of assets
and liabilities which are denominated in foreign currency, to unanticipated changes in the
exchange rates, when the assets or liabilities are liquidated.

Translation Exposure: Translation exposure arises from the need to "translate" foreign currency
assets or liabilities into the home currency for the purpose of finalising the accounts for the
given period.
Value Added Tax: A Value Added Tax (VAT) is an indirect national tax levied on the value added
in the production of a good (or service) as it moves through the various stages of production.

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.

14.9 Review Questions

1. What actions can a firm take to minimise the global tax liabilities? On ethical grounds, can
such actions be justified?
2. How might an MNC use transfer pricing strategies? How do import duties affect transfer
pricing policies?
3. What are the various means the taxing authority of a country might use to determine if a
transfer price is reasonable?

4. Discuss how an MNC might attempt to repatriate blocked funds from a host country.
5. Affiliate A sells 5000 units to affiliate B per year. The marginal income tax rate for affiliate
A is 25% and for B is 40%. The transfer price per unit is currently $ 2000 but it can be set at
any level between $ 2000 and $ 2400. Derive a formula to determine how much annual
after tax profits can be increased by selecting the optimum transfer price.
6. Affiliate A sells 5000 units to affiliate B per year. The marginal income tax rate for affiliate
A is 25% and for B is 40%. Additionally, affiliate B pays a tax deductible tariff of 5% on
imported merchandise. The transfer price per unit is currently $ 2000 but it can be set at
any level between $2000 to $2400. Derive (a) the formula to determine the effective
marginal tax rate for affiliate B and (b) a formula to determine how much annual after tax
profit can be increased by selecting the optimum transfer price.

Answers: Self Assessment

1. Income tax 2. Value Added Tax (VAT)

3. Foreign subsidiary 4. Tax haven
5. Strategic intent 6. Functional division structure
7. market area, product 8. Decision making
9. Exchange rates 10. Home currency

LOVELY PROFESSIONAL UNIVERSITY 279