Deck 20: Managing the Multinational Financial System

Question 1

______ 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 1

A

Question 2

One of the few legal means of moving funds internationally that an MNC has is the use of the

A)transfer price mechanism
B)intercompany loan
C)back-to-back loan
D)parallel loan

Answer 2

B

Question 3

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 law of one price

Answer 3

D

Question 4

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 5

The type of tariff that levies import duties that are set as a percentage of the value of the imported goods is known as the

A)ad valorem tariff
B)protective tariff
C)revenue tariff
D)flat-rate tariff

Question 6

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 7

Through which one of the following does the MNC have considerable freedom to transfer funds,allocated profits or both?

A)financial channels
B)supply chains
C)economies of scope
D)transfer prices

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

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

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

Question 10

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

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

Question 11

______ from the subsidiary to the parent is still the MOST important method of transferring funds in the MNC.

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

Question 12

When MNCs transfer funds among foreign units to earn higher risk-adjusted yields on excess funds,we say they are conducting

A)regulatory arbitrage
B)financial arbitrage
C)tax arbitrage
D)centralization of fund management

Question 13

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 14

Which one of the following would NOT be an important use of transfer pricing by a MNC?

A)avoiding customs inspections
B)avoiding exchange controls
C)reducing taxes
D)reducing tariffs.

Question 15

Reinvoicing centers are usually set up in __________ jurisdictions.

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

Question 16

Using transfer prices may lead to _____.

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

Question 17

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 18

The value of the multinational financial system is NOT based on the ability to take advantage of

A)tax arbitrage
B)financial market arbitrage
C)regulatory system arbitrage
D)differing political systems between subsidiaries

Question 19

Tax arbitrage

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

Question 20

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 21

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 22

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
D)inventory stocking policies

Question 23

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 24

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 25

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 26

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 27

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

Question 28

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 29

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 30

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 31

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 32

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 33

The best ways)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

Question 34

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 35

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