1

MANAGING THE MULTINATIONAL

FINANCIAL SYSTEM
GROUP 12
FATHUR GUMILANG (1210534011)
ATIKAH GALUH WILANDRA
(1210534013)
DEWI FITRAH ILAHI (1210534025)

CHAPTER 0VERVIEW
I. THE VALUE OF THE MULTINATIONAL
FINANCIAL
SYSTEM
II. INTERCOMPANY FUNDFLOWMECHANISMS:
COSTS AND
BENEFITS
III. DESIGNING A GLOBAL REMITTANCE
POLICY

THE VALUE OF THE MULTINATIONAL

FINANCIAL SYSTEM
A. Allows MNC to arbitrage
1.
Tax systems
2.
Financial markets
3.
Regulatory systems

THE VALUE OF THE MULTINATIONAL

FINANCIAL SYSTEM
A.

Tax Arbitrage
1.
Wide variations exist in global
tax
systems
2.
Firms reduce taxes paid-move
funds to
low-tax jurisdiction

THE VALUE OF THE MULTINATIONAL

FINANCIAL SYSTEM
B.

Financial Market Arbitrage

1.
Assume imperfect markets
because
a.
Formal barriers to trade
exist
b.
Informal also exist
c.
Imperfections in domestic
capital markets exist.

THE VALUE OF THE MULTINATIONAL

FINANCIAL SYSTEM
C.

Regulatory Arbitrage
1.
Arises when subsidiary profits
vary due to
local regulations.
2.
Example:
a.
Government price controls
b.
Union wage pressures, etc.
3.
Firms may disguise true profits in
order to
gain better negotiations

INTERCOMPANY FUND-FLOW
MECHANISMS: COSTS AND BENEFITS
Inter-company Fund Flows
1.
Tax Factors:
a. Taxes available on
1.) corporate income
2.) personal income
(includes dividends)

INTERCOMPANY FUND-FLOW
MECHANISMS: COSTS AND BENEFITS
2. Transfer Pricing
Pricing internally-traded goods
for the
purpose
of moving profits to a more
tax-friendly nation.
Uses of Transfer Pricing
1. Reduces taxes paid
2. Reduces ad valorem tax
3. Avoids exchange controls

INTERCOMPANY FUND-FLOW
MECHANISMS: COSTS AND BENEFITS
3. Reinvoicing Centers
a.
Set up in low-tax nations.
b.
Center takes title to all goods.
c.
Center pays seller/paid by buyer
all within the MNC.
d.
Advantages:
1.) Easier currency changing
2.) Other invoice currency,
other than local, available.

INTERCOMPANY FUND-FLOW
MECHANISMS: COSTS AND BENEFITS
e.

Disadvantages of Reinvoicing
1.) Increased communications
costs
2.) Suspicion of tax evasion by
local governments.
4. Fees and Royalties
a.
Firms have control of payment
amounts.
b.
Host governments less suspicious.

INTERCOMPANY FUND-FLOW
MECHANISMS: COSTS AND BENEFITS

5. Leading and Lagging

a.
Highly favored by MNCs
b.
Value depends on opportunity
cost
c.
No need for formal debt
d.
Less chance of local government
suspicion.

INTERCOMPANY FUND-FLOW
MECHANISMS: COSTS AND BENEFITS
6. Intercompany Loans
a.
Useful when following present:
1.)
2.)
3.)

Credit rationing
Currency controls
Differential tax rates

INTERCOMPANY FUND-FLOW
MECHANISMS: COSTS AND BENEFITS
b. Types of Inter-company Loans
1) Back-to-back loans
a. Often called fronting loan
b. Loan channeled through a bank
c. Loans collateralized by parent deposit.
Advantages
1. protects against
confiscation
2. reduces taxes
3. accesses blocked funds

INTERCOMPANY FUND-FLOW
MECHANISMS: COSTS AND BENEFITS
2). Parallel loans: Consists of 2 related but
separate loans with 4 parties
in 2
nations.
Purpose of parallel loan
(1.)
repatriate blocked funds
(2.)
avoid currency controls
(3.)
reduce currency exposure

INTERCOMPANY FUND-FLOW
MECHANISMS: COSTS AND BENEFITS
7.
Dividends: Most important method of
transferring
funds to parents
Tax Effects
Financing Requirements
Exchange Controls
Joint Ventures
8. Equity versus Debt

DESIGNING A GLOBAL
REMITTANCE POLICY
A.

Factors:
1.
Number of financial links
2.
Volume of transactions
3.
Ownership patterns
4.
Product standardization
5.
Government regulations

DESIGNING A GLOBAL REMITTANCE

POLICY
B.
Information Requirements of a Global
Remittance Policy-firm needs following
details
1.
Subsidiary financing
requirements
2.
Sources/costs of external capital
3.
Local investment yields
4.
Financial channels available

DESIGNING A GLOBAL REMITTANCE

POLICY
B.

Information Requirements (cont)

5.

Transaction volume

6.

Relevant tax factors

7.

Government restrictions on

transfer of

funds.