Deck 16: Managing the Multinational Financial System

Question 1

The best way(s) to increase the present value of after?tax remittances from overseas is (are) to

A) invest parent funds as debt rather than equity
B) borrow in the local currency
C) hedge exchange risk
D) speed up the payment of dividends

Answer 1

A

Question 2

Reinvoicing centers are usually set up in __________ jurisdictions.

A) economically secure
B) politically stable
C) high-tax
D) low-tax

Answer 2

D

Question 3

______ is the pricing of internally traded goods for the purpose of moving profits to a more tax-friendly nation.

A) Transfer pricing
B) Leading and lagging
C) Arm's length pricing
D) Advanced pricing

Answer 3

A

Question 4

A French subsidiary that earns $1 million before?tax pays French tax of $.5 million and remits the remaining $.5 million as a dividend to its U.S. parent. It pays a 10% dividend withholding tax on its remittance. Under current tax law, the parent will owe U.S. tax on this dividend equal to

A) $40,000
B) $460,000
C) $207,000
D) nothing. It will also receive a foreign tax credit of $210,000.

Question 5

One advantage of the use of fees or royalties to manage the MNC's cash flow is ____.

A) less communications costs
B) less exchange rate risk
C) more favorable tax treatment by the parent country's government
D) less suspicion by the host government

Question 6

Which one of the following would government taxing authorities NOT use to establish arm's length pricing?

A) comparable uncontrolled price method
B) resale price method
C) cost-plus method
D) the marketing department's best estimate

Question 7

Tax arbitrage
A) arises when barriers to trade exist

A) arises when subsidiary profits vary due to local regulations
B) occurs due to the incidence of capital flight
B) occurs when firms move funds to lower tax jurisdictions

Question 8

Which one of the following is a real rather than a financial flow?

A) capital goods
B) dividends
C) equity investment
D) credit on goods and services

Question 9

The value of the multinational financial system is based on the ability to take advantage of

A) tax arbitrage
B) financial market arbitrage
C) regulatory system arbitrage
D) all of the above

Question 10

______ from the subsidiary to the parent are still the most important method of transferring funds in the MNC.

A) Parallel loans
B) Leading and laggng
C) Dividends
D) Credit rationing

Question 11

One disadvantage of a reinvoicing center is _______ .

A) less chance of local government suspicion
B) less communication costs
C) more communications costs
D) more exchange rate risk

Question 12

Subsidiaries A and B buy from and sell to each other. Suppose that A has excess cash, whereas B is short of cash. How can A funnel money to B?

A) A can lead payments owed to B
B) B can lag payments owed to A
C) A can raise transfer prices on goods sold to B
D) a and b only

Question 13

Intercompany loans are useful during periods of ______ in the financial markets.

A) credit rationing
B) hyperinflation
C) currency depreciations
D) capital flight

Question 14

Leading and lagging is primarily of value because of

A) tax regulations
B) foreign exchange risk
C) expropriation risk
D) exchange and capital controls

Question 15

Suppose a firm earns $2.5 million before?tax in Spain. It pays Spanish tax of $1.3 million and remits the remaining $1.2 million as a dividend to its U.S. parent. The Spanish dividend withholding tax is 5%. Under current U.S. tax law, the parent will owe U.S. tax on this dividend equal to

A) $1.15 million
B) $552,000
C) nothing. It will also receive a foreign tax credit equal to $1.3 million.
D) nothing. It will also receive a foreign tax credit equal to $510,000.

Question 16

MNCs may use _______ arbitrage to resist government price controls or union wage pressures.

A) tax
B) financial system
C) regulatory
D) triangular

Question 17

Using transfer prices may lead to _____.

A) increased local taxes
B) reduced ad valorem tariffs
C) exchange rate controls
D) decreased political risk

Question 18

Which one of the following is an example of a market imperfection in the domestic capital market?

A) transactions costs
B) costs of obtaining information
C) ceilings on interest rates
D) restrictions by nationality of investor

Question 19

A firm that earns $1 million before?tax in Brazil pays Brazilian tax of $250,000 and remits the remaining $750,000 as a dividend to its U.S. parent. It pays a 10% dividend withholding tax on its remittance. Under current U.S. tax law, the parent will owe U.S. tax on this dividend of

A) $40,000
B) $340,000
C) $15,000
D) nothing. It will also receive a foreign tax credit of $90,000.

Question 20

Suppose affiliate A sells goods worth $1 million monthly to affiliate B on 30 day credit terms. A switch in credit terms to 120 days will involve a one?time shift in cash of

A) $3 million from A to B
B) $3 million from B to A
C) $4 million from A to B
D) $4 million from B to A

Question 21

Which one of the following is NOT a factor in developing a global remittance policy?

A) number of financial links
B) global investment yields
C) ownership patterns
D) volume of transactions

Question 22

The extensive system of foreign tax credits allows

A) U.S. MNCs to lower their effective tax rate on foreign?source income to below the U.S. corporate tax rate
B) governments to collect more taxes from MNCs
C) reduce the amount of taxes they owe the host country
D) MNCs to avoid double taxation on foreign?source income

Question 23

Which of the following is NOT characteristic of a back-to-back loan?

A) it is a method to reduce exchange rate risk
B) it is know as a fronting loan
C) it is a loan channeled through a bank
D) it is collateralized by the parent's deposit

Question 24

Suppose a foreign subsidiary earns $2 million after paying foreign income taxes of $500,000. If the subsidiary retains all of its earnings, what is the amount of the indirect foreign tax credit that its parent will receive?

A) $500,000
B) $250,000
C) $400,000
D) it receives no foreign tax credit

Question 25

Suppose affiliate A sells 10,000 chips monthly to affiliate B at a unit price of $15. A's tax rate is 45% and B's tax rate is 55%. In addition, B must pay an ad valorem tariff of 12% on its imports. If the transfer price on chips can be set anywhere between $11 and $18, how much can the total monthly cash flow of A and B be increased by switching to the optimal transfer price?

A) $3,000
B) $4,000
C) $1,840
D) $1,380

Question 26

Which one of the following is not an information factor in developing a global remittance policy?

A) subsidiary financing requirements
B) costs of external capital
C) financial channels available
C) inventory stocking policies

Question 27

Which one of the following cash flow mechanisms arouses the least suspicion from a host government concerning a multinationals attempts to avoid additional taxes?

A) transfer pricing
B) reinvoicing centers
C) royalties
D) leading and lagging

Question 28

Leading and lagging strategies have several advantages EXCEPT

A) no formal note of indebtedness is needed
B) governments are less like to interfere with payments on intercompany accounts
C) interest must be charged on all intercompany accounts
D) intercompany accounts up to six months are interest free

Question 29

Arco ships 15 million barrels of refined oil monthly from Arco?Canada to Arco?U.S. Arco?U.S. has to pay a U.S. ad valorem tariff of 6%. Tax accountants advise Arco that it can set the transfer price in the range of $15?$18 per barrel of product. The current price is set at $16 a barrel. If Arco-Canada's tax rate is 50% (the U.S. rate is 46%., what is the incremental cash flow per month associated with using the optimal transfer price?

A) $236,000
B) $1,343,000
C) $1,086,000
D) $32,670

Question 30

Suppose a foreign subsidiary earns $1 million after paying foreign income taxes of $800,000. If the subsidiary pays a dividend of $600,000, what is the amount of the indirect foreign tax credit that its parent will receive?

A) $480,000
B) $800,000
C) $400,000
D) it receives no foreign tax credit