IBF Ch 16 and 18 - Lecture 11 (Ch16) Taxes & Multinational...

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Lecture 11 (Ch16) Taxes & Multinational Corporate Strategy Tax Neutrality A neutral tax is one that does not divert the natural flow of capital from its most productive uses. Taxes are a form of market friction As long as taxes fall neutrally on all business activities, they are merely a dream on cash flows and do not divert capital from its natural destinations Domestic tax neutrality Incomes arising from domestic and from foreign operations are taxed similarly by the domestic government. Foreign tax neutrality Taxes imposed on the foreign operations of domestic firms are the same as those facing local competitors in the host countries. Violation of tax neutrality Differential taxes influence a number of corporate decisions, including the firm’s choices o f asset classes, financing instruments and organizational forms. Tax jurisdictions . Income received from domestic or foreign are often taxed at different rates. Different asset classes . Income received from different types of assets in the same tax jurisdiction, such as active business income versus passive income, is often taxed at different rates or at different times. Different financing instruments . Returns on financial securities are taxed differently depending on whether the security is debt, equity (i.e. interest is tax deductible). Different organizational forms . Income received from different legal organizational forms often is taxed at different rates or in different ways foreign branches or foreign corporations
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Forms of Taxation Explicit Taxes Corporate in personal income taxes Withholding taxes on dividends, interest and royalties Sales or value-added taxes Property or asset taxes Tariffs on cross-border trade Implicit Taxes The law of one price requires that equivalent assets sell for the same price. The law of one price requires that equivalent assets sell to yield the same after-tax real rate of return. i f (1-T f ) = i d (1-T d ) As a consequence, countries with low tax rates tend to have low before-tax expected and required returns. Foreign Source Income Two basic systems of taxation: Worldwide tax system foreign-source income is taxed by the home country as it is repatriated to the parent Territorial tax system imposes a tax only on income that is earned within the borders of the country, re gardless of the location of the taxpayer’s incorporation or operations. That is, domestic income pays domestic tax; foreign income pays tax in the country in which it was earned. Taxes affect the organizational form of foreign operations. In most worldwide tax systems: Foreign corporation income is taxed as it is repatriated to the parent. Foreign branch
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This note was uploaded on 08/06/2011 for the course FIN 3616 taught by Professor Henry during the Three '11 term at University of New South Wales.

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IBF Ch 16 and 18 - Lecture 11 (Ch16) Taxes & Multinational...

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