Lecture%2027%20Outline

Lecture%2027%20Outline - subsidiary for $2,500 earning a...

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GEOGRAPHY 216 Lecture 27 – MNC investment patterns (Reading 18) Outline Foreign direct investment (FDI) MNC monetary flows in and out of the host country Tables and figures in the reading FDI: changing sectoral distribution FDI: uneven global distribution MNC’s global image Benefits from ‘good behaviour’ on the part of MNCs Operating in risky places Transfer pricing Germany (tax rate of 48%) A software system is manufactured by the parent firm at a cost of $2,000. It is then sold to the firm’s Irish subsidiary for $2,000. German taxes paid: $0 Ireland (Tax rate = 4%) The Irish subsidiary turns around and sells the same system to the U.S.
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Unformatted text preview: subsidiary for $2,500, earning a $500 profit. Irish taxes paid: $20 United States (Tax rate = 34%) The U.S. subsidiary sells the system at cost for $2,500. No profit is earned. U.S. Taxes paid: $0 NOTE : Some authors suggest that transfer pricing is still used by MNCs while others state that many countries control this practice (illegal). If laws are in place and enforced, transfer pricing can be monitored. On the other hand, in countries where the rule of law is still relatively weak, transfer pricing would be possible....
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