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1 Please log in my.unsw.edu.au to fill in teaching and course evaluations for this subject, so that your feedback can bring benefits to future students. Many thanks. This is to kindly remind you of the deadline (Jan 26, 2010).
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2 Multinational Financial Management Alan Shapiro 9 th Edition J.Wiley & Sons Power Points by Joseph F. Greco, Ph.D. California State University, Fullerton
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3 CHAPTER 20 Managing the Multinational Financial System
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4 MANAGING THE MULTINATIONAL FINANCIAL SYSTEM I. THE VALUE OF THE MULTINATIONAL FINANCIAL SYSTEM Its value lies in its ability to arbitrage in the following areas: 1. Tax systems 2. Financial markets 3. Regulatory systems 4. Credit restraints negation
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5 TAX ARBITRAGE Tax Arbitrage is possible because we know: 1. Wide variations exist in global tax systems examples: Germany vs. Honk Kong 2. Firms want to reduce taxes paid especially the “triple-taxed” MNC move funds to low-tax jurisdiction
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6 TAX ARBITRAGE 3. Tax Factors (triple taxation): a. Triple Taxes may be levied on 1.) corporate income 2.) personal income (includes dividends) 3.) subsidiary income b. U.S. Tax System Provision Offset: Foreign tax credit given on tax already paid abroad.
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7 FINANCIAL MARKET ARBITRAGE Financial Market Arbitrage is possible if we 1. assume imperfect markets exist because a. Formal barriers to trade exist: exchange controls, direct taxes on international movements of funds, differential taxation of income streams from different nationalities, and so on
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8 b. Informal barriers also exist: Cost of obtaining information, transaction costs, difficulty of enforcing contract across national boundaries, traditional investment patterns c. Imperfections in domestic capital markets exist Ceilings on interest rates, limited legal and institutional protection for minority shareholders, limited liquidity, and so on
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9 2. agree parity conditions not in effect, namely a. interest rate parity b. International Fisher Effect
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10 REGULATORY ARBITRAGE Regulatory Arbitrage: 1. Arises when subsidiary profits vary due to local regulations. 2. Examples of local regulations: a. Government price controls b. Union wage pressures: Firms may disguise true profits in order to gain better negotiations advantages
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11 Credit restraints or control negation If a government limits access to additional borrowing locally, then the firm able to draw on external sources of funds may not only achieve greater short-term profits but also a more powerful market position over the long term.
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