International fm,b

Multinational Corporations:- The essential nature of multinational enterprise lies in the fact that its managerial headquarters are located in one country (home country)while enterprise carries out operations in a number of other countries as well(host countries) “ a corporation that controls production facilities having been acquired through the process of foreigndirect investment—ILO report observesMNC meets five criteria :-1.It operates in many countries at different levels of economic development2.Its local subsidiaries are managed by nationals 3it maintains complete industrial organizations which includeR&D, manufacturing facilities in several countries4.It has multinational central management5.It has multinational stock ownership

A transnational corporation is a multinational in which both ownership and control are dispersed ,internationally .There is

no principle domicile and no one central source of power Eg.Royal Dutch,Shell,UnileverA global corporation is one which views the entire world as a single market which should be catered to by globally standardized productsCharacteristics of MNCs:- 1 .Giant size-Asset & sales of MNC2.International Operation – It runs its operations through network

of branches &subsidiaries 3Oligopolistic Power-Process of merger & takeover of other firm4.Centralized control- Headquarters in the home country5.Collective Transfer of resources – Technical know –how ,rawmaterials, management expertise, machinery,etc 6.International Market

Reasons for growth of MNCs :-Benefits to them &their homeCountries –1. MNC can exploit the foreign markets. Export from home country increase.2.MNC get income from abroad like dividends, royalties etc 3.MNC can acquire raw materials at cheaper rate4.Export spare parts for assembling & selling in the foreign

market5.MNC-integratingnational economies into universal system The inflow of capital from abroad -1.FDI includes investment bybraches, subsidiaries, affiliates of foreign companies 2.Portfolio investment- comprise equity holdings by nonresidentIn Indian companies debt capital from foreign sources in Indiancompanies

Benefits Achieved by host countries

1.Transfer of Technology2.HR Development3Health competition4Foreign Capital 5.R&D6.Employment opportunities

Benefits to Home countries 1.Huge revenue 2.cheaper raw materials 3.utillize talents 4 Generate employment

Foreign Exchange Market:-Foreign exchange arises out of international trade .Foreign exchange is the system or process of converting one national currency into another, &of transferringmoney from one country to another” Paul Einzing The foreign exchange market is the market in which individuals firms & banks buy & sell foreign currencies or foreign exchange. Four levels of transactors or participants can be identified inforeign exchange markets. First levels are tourists, importers,exporters, investors etc, second level are the commercial banks which act as clearing houses between users &earners of foreignexchange .Third level are foreign exchange brokers. The final level is central bank ,acts as seller or buyer of last resort

Segments of foreign exchange Market:-1.Over the Counter(OTC)market &2.Exchange traded market1.Over the counter market –OTC It is an informal arrangementamong the banks &brokers operating in a financial centre buying&selling currencies connected to each other by telex, telephone,satellite communication net work Eg. RBI, it comprises both Commercial banks & investment banks, financial institutions2.Exchange Traded Market – comprises of securities exchange,future &options are tradedFunctions of Exchange Market:- 1. Currency conversion2.Provision of credit: Exporters &Importers get pre -shipment &Post -shipment credit, ECGC gives loan(Expo. Credit Guaran corp.3.Insurance against foreign exchange risk:-Foreign Exchange Market

provides insurance to protect against the possible adverse Consequences of unpredictable changes in exchange rates

Instruments of foreign Exchange-:1.Spot rate: -It is the exchange Rate quoted for transactions that require ether immediate

delivery or delivery with in two days2.Forward rate :-The transaction which involves the exchange ofCurrencies beyond three days at a fixed exchange rate. It can be for one month or three months etc. A forward contract for delivery one month means the exchange currencies will take

place after one month from the date of contract3.At par- If the forward exchange rate quoted is exactly

equivalent to the spot rate at the time of making the contract.4.Arbitrage :-The exchange rate between any two currencies is

kept the same in different monetary centers by arbitrage. Thisrefers to the purchase of currency in the monetary centre where it is cheaper ,for immediate resale in the monetary centre

where it is more expensive in order to make profit

5.Currency swap:-A currency swap refers to a spot sale of currency combined with a forward repurchase of the same currency – as a part of single transaction.6.Hedging:-A transaction strategy used by traders and investors In foreign exchange to protect an investment or portfolio against currency price fluctuations. A current sale by or purchase is offset by contracting to purchase or sell at specified future datein order to defer a profit or loss on the current sale or purchase.In this way risk due to currency price fluctuations is reducedFactors influence the rate of exchange :1.Trend in foreign trade2.Capital Movements. 3.Speculative activities 4.Bank rate

5.Govt control . 6.Miscellaneous factors

1.Trend in foreign trade:- Exports &other services rendered to another country will bring foreign exchange for the country. If exports exceed the imports exchange rate will change to be favourable to the country while excess of imports over the exports will make the rate of exchange unfavorable to the country .The changes in foreign trade of the country lead to the fluctuations in the rate of exchange. 2.Capital Movements:-Capital movements in the form loans of & investment between the countries also influence the exchangerates. Sometimes large scale capital movements take place

through stock exchange transactions. If home investors purchase securities ,the demand for foreign currencies will go

up & exchange rate will become unfavourable. If foreigners buy securities floated in the country ,the rate of exchange will become

favourable

Speculative activities:- Speculators in exchange markets who buy a currency from centres where it is cheap ,with a view to

sell it where it is high and thereby make profits Similarly people expect the price of currency will go up so they buy the currency to make profit in future4.Bank rate:-High bank rate will attract fund from foreign

countries, then rate exchange will be favourable &vice versa5Currency &Credit condition;-These are influenced by the monetary policy of the country. If the supply of currency & bank credit increases over number of years it will affect export and increase the import6.Government control:-Govt . should control all the foreign

exchange transaction in the country – Need stability of Govt 7.Miscellaneous factors:-stability ,prestige, respect of currency

will play a big role in the world market

Balance of Payment:-Balance of payment is a systematicrecord of all transactions between the residents of country &therest of the world during a given period .Credit side shows Receipts of foreign exchange from abroad and the debit side

shows payments in foreign exchange to foreign residents.Receipts and payments are in two heads – one being the current

account and the other being the capital account. The current account represents transfer of real income and the

capital account is only transfer of funds without effecting a shift in real income.

Current AccountTransactions are those relating to export and import of services,

income on investments and unilateral payments (gifts, remittances for family maintenance, etc).

Current Account records the receipts & payments of foreign exchange in the following ways:-

1. Current account receipts -> (i) Export of goods (ii) Invisible (services, unilateral transfers, investment

income) (iii) Non – monetary movement of gold

2. Current Account Payments -> (i) Import of goods(ii) Invisible (services, unilateral transfers, investment

income) (iii) Non – monetary movement of gold

Export of goods will bring foreign exchange in the country & the import of goods causes outflow of foreign exchange from the country. The difference between these two is known as balance of trade.

If the credit side is greater than debit side, the difference shows current account surplus. Thus, representing net foreign investment (If).

If > 0 (Nation is investing part of its savings (S) abroad instead of in domestic capital formation (Id))

Current account surplus = X-M (Export - Import)On the contrary, if the debit side >credit side, which indicates

current account deficit.Thus, nation is disinvesting abroad.Current account deficit = import > exportInvisibles & Current AccountThe key drivers of invisible receipts were travel earnings,

software exports and workers’ remittances.

Capital Account Transaction:-The capital account transactions take the following ways :-1.Capital Account receipts >1.Long term

Inflow funds (2) Short term inflow funds 11. Capital account payments :-1.Long term outflow fund (2) Short term outflow of fundsCapital account receipts :The long term maturity is over one year, while in the short term flows are effected one year or less The credit side records the official &private borrowing from abroad net of repayments, direct and portfolio investment & short term investments into the country. It records the bank balances of the non residents held in the country. The debit side includes disinvestments of capital, country’s investment abroad, loans given to foreign government or a foreign party and bank balances of the non-residents held in the

country.

Movement of gold may be monetary or non monetary. Monetary movement is the sale or purchase that influences the international monetary reserves.

Non monetary sale and purchase of gold is done for industrial purposes that is shown in the current account either separately or along with the trade in merchandise

When credit side of the current account along with the credit side of the long term capital account transactions is compared with the transactions on the debit side of the current account Plus the long term capital account, the difference is known as the basic balance which may be negative or

positive

The debit and credit sides of short term capital transactions are addedto their respective sides and then capital account is balanced. After balancing the capital account errors and omissions are mentioned .Finally two sides are compared. The difference is known as overall balanced

Balance of trade =Export of goods - Import of goods Balance current a/c =Balance trade +net earning on invisibles

Balance of Capital a/c =Foreign exchange inflow – foreign

exchange outflow, (on account of foreign investment, foreign loans, banking transactions & other capital flows)Overall balance of payments = Balance of current + balance of capital account +statistical discrepancyStatistical discrepancy is known as errors and omissions Official Reserve Account :- Official reserves are held by themonetary authorities of a country .It consists of monetary gold,SDR allocations by IMF &foreign currency assets. If overall BOP

is surplus, the surplus amount adds to the official reserve account. If BOP is deficit & if accommodating capital is not available the ,official reserve account is debited by the amount of deficit.

Country A :-Balance of payments1998-99 (Rupees) Credit Debit BalanceA . Current Account Merchandise import - ------- -------------- 120 Merchandise export ------------- 100 Balance of trade (120-100) --------- -------------------------- -20 Invisibles Services (net ) -------------------------- 4 Unilateral transfers (net)-------------------- 2 Invest income (net) - ----- ---------------- ------------ 1 Non monetary movement of gold(net) --- ------------ Balance of current account --(4 +2) -1=5 –(-20 ) ………. -15

B.Capital Account -- Long –term Direct investment abroad ---------------------------- 11 Direct foreign investment inflow -- ------ 18 Portfolio investment(net)------------------ 9 Loans-official & private net repayment 12 Basic balance (100+4+2+18+12 =(136) (120 + 11 +9 +1 ) =(141 ) >136-141 ---------------------- -5

Capital Account ---Short term Credit - Debit - Balance Holdings with banks --------------- 4 Other short term transactions --------------------- 3 Balance of capital account (foreign exchange inflow – outflow) (18+12+4) =34 -23 (11+9+3) ------------------------ 11 C. Errors& Omissions -1 Overall Balance (Balance of current account + Balance of capital a/c + statistical discrepancy )(errors omission) (-15) + (11)= - 4 +(-1) --------------------------------- -5

D. Official Reserves SDR (other short term transactions)-- 3 Net official reserves -------------------- 2 Overall balance ----- ----------------------------------- -5

Office Reserves Movement ………….. 5

International Bond Market :-The international bond market(IBM)encompasses two basic markets segments :foreign bonds and Eurobonds. A foreign bond issue is one offered by a foreign borrower to the investors in a national capital market and denominated in that nation’s currency. Eg A German MNC is issuing dollar denominated bonds to US investorsA Euro bond issue is one denominated in a particular currency but sold to investors in national capital market other than the country that issued the denominating currencies A Dutch borrower issuing dollar denominated bonds to investors in UK orNetherlands..Roughly 80% of new international bonds are likely to be Eurobonds rather than foreign bonds. Euro bonds are known by currency in which they are denominated Eg.Yen Euro bond, Us.$ Eurobonds. Yankee bonds are dollar denominated foreign bonds originally sold to US

Euro bonds are usually bearer bonds. With bearer bond possession is evidence of ownership. With registered bond the owner’s name is on the bond & it is also recorded by issuer. When registered bond is sold a new bond certificate is issued. National Security regulation Foreign bonds must meet the security regulations of the country in which they are sold. But Eurobond in the USA may not be sold to

US citizens. After 90 days US investor can buy from the secondary

marketWithholding taxes Prior to 1984 ,the USA required on interest 30%withholding tax on interest paid to nonresidents who held US Govt or corporate tax .Moreover, US. firms issuing Eurodollar bonds from the US were required to withhold the tax on interest paid to foreigners

Other Recent regulatory changes:-Two other recent changes in US security regulations have had an effect on the international

bond market.One is Rule 415,which the SEC (Securities & Exchange Commission) instituted in1982 to allow shelf registration. ShelfRegistration allows an issuer to pre-register a securities issue,&then shelve the securities for later sale when financing is actuallyneeded. In 1990 the SEC instituted Rule 144,which allows qualified institutional investors in the Us that do not trade in private Placement issues that do not have to meet the strict Information disclosure requirements of publicly traded issuesGlobal bond Global bond issues were first offered in 1989.AGlobal bond issue is very large international bond offering by a

single borrower that is simultaneously sold in North America, Europe ,&Asia

Types of Instruments: IBM has been much more innovative than the domestic bond market in the types of instruments offered to investors

1. Straight fixed –rate bond issues:-These have a designated maturity date at which the principal of the bond is promised to be repaid. During the life of the bond fixed coupon payments are Paid as interest to the bond -holders. The Us $,UK sterling pounds Japanese Yen have been denominating straight fixed rate bond.

2. Euro-Medium –Term Notes(Euro MTNs) :-These are fixed rate notes issued by corporation with maturities ranging from less than a year to about 10yrs.Euro-MTNs have a fixed maturity and Pay coupon interest on periodic dates. 3. Floating-rate Notes(FRN). It was introduced in 1970.Floating rate notes are medium –term bonds with coupon payments indexed to Some reference rate. Common reference rates are either three month or six month Us dollar LIBOR(London inter bank Offered Rate, used as the basis for setting euro currency loan rates )Coupon payments on FRNs are usually quarterly or semiannual with reference rate

4.Equity –Related Bonds:-There are two types of equity-related bonds. They are Convertible bonds &bonds with equity warrants. A convertible bond issue allows the investor to exchange the bond for a predetermined number of equity shares of the issuer. The floor- value

of a convertible bond is its straight fixed rate bond value.5.Bonds with equity warrants can be viewed as straight fixed rate with the addition of a call option (or warrant ) feature. The warrant entitles bondholder to purchase a certain number of equity shares in the issuer at a pre stated price over a Predetermined period of time. 6.Zero coupon bonds:-The bonds are sold at a discount from face Value & do not pay any coupon interest over their life. At maturity the investor receives the full face value. The zero coupon bonds have been denominated primarily in the US$ &Swiss franc. Japanese investors are attracted to Zero coupon bonds because of tax free capital gain

7.Another form of zero coupon bonds are stripped bonds. A stripped bond is a zero coupon bond that results from stripping the coupons and principal from coupon bond. The result is a series of zero coupon bonds represented by individual coupon principal and payments. The stripped bonds are actually receipts representing a portion of the Treasury security held in trust .In 1985 the US Treasury introduced its own product called STRIPS.8.Dual –Currency:-A dual currency bond is a straight fixed rate bond issued in one currency ,Eg Swiss francs that pays coupon Interest in that same currency. At maturity the principal is repaidin another currency,ie Us$. If the dollar appreciates over the life of the bond, the principal repayment will be worth more than a return of principal in Swiss francs

International portfolio Investment:-The rapid growth in international portfolio investments in recent yrs reflects theglobalization of financial markets. The investors can reduce the risk when they diverse their portfolio holdings internationally than domestically. Security returns are much less correlated across countries than within a country. So international diversification can sharply reduce risk. Rational investors would select modes of portfolios by Considering returns as well as risk. 1.International mutual

funds 2.Country fund & 3.internationally cross-listed stocks, which allow investors to achieve international diversification without incurring excessive costs. The Uk market performed well ranking fourth, owing to the respectable mean return combined with relatively low risk.

International Bond investment:-In the optimal international portfolio, the US bond receives the largest positive weight, followed

by French &Japanese bonds. The investors may be able to increase their gains from international bond diversification if they can properly control the exchange risk. The euro currency is likely to alter the risk return characteristics of the affected markets.

The British bonds would play an enhanced role in international diversification strategies to retain their risk return role.

International Mutual Funds:-By investing IMF, investors can1.Save any extra transaction and or information costs they may have to incur when they attempt to invest directly in foreign markets. 2.Potentially benefit from the expertise of professionalfund manages 3.Many legal & institutional barriers to direct

portfolio investments

In addition to International mutual funds, investors may achieveInternational portfolio diversification by investing in 1.Country Funds,2.American depository receipts(ADRs) , 3.world equity benchmark shares (WEBS),without having to invest directly in foreign markets.Using country funds, investors can -1.Speculate in a singleforeign market with minimum costs. 2.Construct their ownPersonal international portfolios using country funds as

building blocks. 3.Diversify into emerging markets that are otherwise

practically inaccessibleMany emerging markets, country funds provide international investors with the most practical, if not the only, way of diversifying into these largely in accessible foreign markets.

The majority of country funds available ,however, have a closed end status, A closed –end country fund (CECF) issues a given number of shares that trade on the stock exchange of the host

Country2.International Diversification with ADRs :-US investors can achieve

international diversification at home using AmericanDepository Receipts (ADRs) and country funds. ADRs represent receipts for foreign shares held in the US depository banks in foreign branches or custodians. ADRs are traded on US exchange like American securities3.International Diversification with WEBS:In April 1990 AmericanStock Exchange introduced World Equity Benchmark Shares(WEBS).Before this US introduced Standard &Poor’s Depository Receipts(SPDRs) known as Spiders. WEBS&Spiders are exchange

traded open funds so investors can trade stock market index

The investors allocate a disproportionate share of their funds todomestic securities, displaying so called home bias . Home bias is likely to reflect imperfections in the international financial markets like excessive transactions.

The portfolio combining equity shares & bonds is preferable to investment in equity alone or in bonds alone because the combination of equity & bonds raises the risk- adjusted return.

Cross –Boarder Listings of Stocks:- Cross boarder listings of stocks have become quite popular among major corporations.

Novo Industry-Danish Multinational corporation –produces health care products like insulin listed its stock in Newyork Stock Exchange-they directly raise equitycapital in USA.In1970 they decided to enter into international capital market from the Danish stock market.Then they faced

higher cost of capital than competitors. Again they decided to low its capital For that they issued euro bond ,listed in London stock exchange in 1978.Followed This they sponsored ADR.US investors could invest.The

Sharp increse in Novs price indicated stock became fully priced internationally

Foreign Exchange Exposure:-The value of currency changes frequently in the exchange rate system. This change will affect the firm’s assets &liabilities and also cash flow ie they face foreign exchange exposure Eg. Us$ depreciates

against Japanese yen This will affect both US & Japanese firmsIe it can affect adversely the Japanese car makers in the US car market & thereby they are forced to raise more price than Us

car. Three types of Exposure.They are Economic,Tansaction and Translation ---1-Economic Exposure can be defined as

the extent to which the value of the firm would be affected byunanticipated changes in exchange rates2.Transation Exposure:-Transaction exposure is concerned withthe changes in the present cash flows(ie foreign exchange loss /Gain as a result of changes in the exchange rate) But real

operating exposure is related to changes in future cash flows

3.Translation exposure :-refers to the potential that the firm’s Consolidated financial statements can be affected by changes in exchange rates. Consolidation involves translation of subsidiaries ‘ financial statements from local currencies to thehome currency.(Ie UK company has subsidiaries in many countries ,all the statements of local currency will be convertedto sterling pounds .

Economic Exposure:- Value of the firm would be affected by unanticipated changes

in exchange rates. It measures “what is at risk". Normally a firmwill not face any exposure even if the exchange rates change Randomly.(Eg A company maintains a vacation home for employees in the British country side. Whenever pound depreciate local price of the property goes up .So the dollar price

of the asset insensitive to exchange rate changes

The impact of inflation &changes in exchange rate on the future cash flow may vary under different market conditions. As far

as revenue is concerned ,impact may vary if the firm produces1.For the export market 2.for the domestic market but competit- ion from import is present 3.For domestic market &there is no

competition from abroadSimilarly the impact of inflation &exchange rate changes on the

cost structure shall be different if the firm –1 imports inputs2.Procures inputs from domestic sources, but competition fromforeign supplier is present .3. Gets inputs from domestic sourcesand there is no competition from foreign suppliers Managing operating Exposure:- The objective of managing operating exposure is to stabilize cash flows in the face of fluctuating exchange rates

Sometimes local price of currency changes ie appreciate, theDollar value of the asset will be sensitive to exchange rate.Then the company expose currency risk.

Currency risk is properly measured by the sensitivities of 1.the future home currency values of the firm’s assets&liabilities 2.The firm’s operating cash flows to random changes in exchange rates Operating Exposure ;- It can be defined as theextent to which the firm’s

operating cash flows would be affected by random changes in exchange rates .Determinants of operating Exposure --:-A firm’s operating exposure is determined by(1)the structure of the markets in

which the firm sources its inputs like labour &materials and sells its products( 2’)the firm’s ability to mitigate the effect of exchange rate changes by

adjusting its markets,Product mix and sourcing

Real operating measure arises when changes in exchange rate,together with rates of inflation

The firm can use the following strategies for managing operatingExposure –1.Selecting low cost production sites 2. Flexiblesourcing policy .3.Diversification of the market.4.Productdifferentiation and R&D efforts. 5.Financial Hedging Operating cash flow is governed not only by inter firm transactions but also by intra firm transaction. A larger number Of currencies are involved there than in the case of a domestic firm. some currencies may appreciate while others may depreciate. So it is only the net effect that determines the size of real operating exposure.Financial Swap :-Borrower may not have an easy access to a Particular segment of financial market of its own choice.Eg.a firmneeds fixed rate funds but has easy access to floating rate funds.A firm needs borrowing from the US$ market,but has an access to Euro market.So itCan borrow funds from the easily available sources &can exchange its liability

into another form of liabilityof its own choice.This exchange is swap ie it can swap the euro loan for Us $loan in the swap market.

Corporate governance can be defined as the economic ,legal and institutional frame work in which corporate control and cash flow rights are distributed among shareholders ,managers, and other stake holders of the company. Other stake holders may include workers, creditors, banks, institutional Investors and even governmentGovernance of the public corporation :-jointly owned by manyShareholders with limited liabilityCollect large amounts of capitals with limited liability & under –take many investment projects. Public corporation has weaknessie conflicts of interests between managers and shareholdersThe central problem of Public corporation how to protect

outside investors by expropriation by the controlling insiders.

The following are issues : Agency problem 2.Remedies for the agency problem 3.Law &corporate governance 4.Consequences of law .5.Corporate governance Reform

Agency problem :-If the two sides (mangers & investors) write Complete contract there will be no agency problem. It is the fiduciary duty of mangers to return free cash flows to shareholders

as dividendsRemedies for agency problem1.Share holders have right to elect the board of directors2.Incentive contracts -Mangers do not own equity share &do nothave cash flow rights .3.concentrated Ownership.-Investors own51%shares .4.Debt.ail -If managers fail to pay interest to creditors

the managers should be dismissed.5.overseas stock listings.-protect better investors 6.Market for corporate

controll :-take over week the company

7.Law &corporate governance. Commercial legal systems arenecessary especially English common law &French Civil lawOwnership &control pattern:-Dominant investors may acquire Control through various schemes viz-Shares with superior voting rights 2.Pyramidal ownership structure-(founders and theirfamilies 3.Interfirm cross holding (equities among group of

companies)4.Private benefits of control-Large shareholdersacquire control right and cash flow right .5.Capital Markets &Valuation—Investors promotes the development of external

capital marketsCorporate Governance Reform:1-Germany &Japan introduced

bank centered governance system (long term performance)infinancial distress.US introduced market centered governance System(short term). 2.Political Dynamics-Many parties have

vested interest

International Tax Environment :-Two basic objectives -1.Tax Neutrality .2.Tax equity. ----Tax neutrality is determined by threeCriteria. They are 1.capital export criteria, 2.national neutrality3.Capital import neutrality….1.The capital export criteria isthat an ideal tax should be effective in raising revenue for the Government and not have any negative effects on the economic decision –making process of the tax payer. It is based on

worldwide economic efficiency.2.National neutrality IT is taxable income, taxed in the same Manner by the tax payer’s national tax authority regardless of where in the world it is earned.3.The capital –import neutrality implies that tax burden a host

Country imposes on the foreign subsidiary of MNC should be the same regardless of which country the MNC is incorporated &same as that placed on domestic firms

Types of Taxation:.Income tax ,withholding tax, value added tax1.An income tax is direct tax. The tax is levied on active income2.A withholding tax, levied on passive income earned by an Individual or corporation of one country within the tax Jurisdiction Of another country .Passive income includes dividends &interest

income,& income from royalties, patents or copy - rights paid to the tax payer. Many countries have tax treaties with one another specifying the withholding tax rate applied to various types of passive income.3.Value –Added Tax is an indirect national tax levied on the value added in the production of goods or services as it moves throughthe various stages of production. There are several ways to Implement a VAT. The subtraction method is used in practice to collect

the tax Equity means that everyone should pay taxes according to his ability topay

National Tax Environment:-International Investor is a function of the tax jurisdictions established individual countries in which the MNC does business or in which the investor owns financial assets There are two fundamental types of tax jurisdiction ie 1.worldwide &2. territorial :-

1.The worldwide or residential method of declaring a national tax jurisdiction is to tax national residents of the Country on their worldwide income no matter in which country it is earned .The national tax authority is declaring Its tax jurisdiction over people &business. Thus MNC would be taxed in its home country & host countries. So there is possibility of double taxation exists.

Territorial Taxation:- The territorial or source method of declaring a tax jurisdiction is to tax all income earned within thecountry by any taxpayer, domestic or foreign. Hence regardless of thenationality of a tax payer,if the income is earned within the territorialboundary of a country , it is taxed by that country.

Foreign Tax Credits:-It means to eliminate double taxation. Foreign tax credits are categorized as direct or indirect .A direct tax credit is computed for direct taxes paid on active foreign source income of foreign branch of of a US.MNC or on the indirect withholding taxes withheld from passive income

distributed by the foreign subsidiary to the US.parentS. ForForeign subsidiary of US.MNC,s,an indirect foreign tax credit is

computed for income taxes deemed paid by the subsidiary. The deemed-paid tax corresponds to the portion of the distribution of earnings available for distribution that were distributed. Eg.if wholly owned foreign subsidiary pays out dividends equal to 50% of the earnings available for

distribution,the deemed paid tax credit is 50% of the foreignIncome taxes paid by the foreign subsidiary.

A tax haven country is one that has a low corporate income taxrate &low withholding tax on passive income.In Ireland & Netherlands, special tax incentives or tax holidays are

granted for business that will earn hard currency or develop export markets.A controlled foreign corporation (CFC) is a foreign subsidiary that has

more than 50% of its voting equity owned by US share holders .A US shareholder is any US. citizen, resident, partnership corporation, trust, or estate that owns(or indirectly controls) 10% or more of the voting equity of the controlled foreign corporation

Modes of Double taxation relief:-Double taxation relief is normally granted by the country in which parent company has itsLegal residence. They are:-1.credit system without deferral2.Credit system with deferral.3.Exemption.4.Deduction of tax Paid abroad 5.Investment credit.

Credit system without Deferral:-Taxes as credit paid in the host as country are allowed as a credit against the tax liability in the home country. It is based on the principle of capital –exportneutrality. Eg The tax rate in India is 35% & a foreign subsidiary of an Indian company pays taxes on its profit at the rate of 40% in the host country. The Indian Government will allow the excess tax paid in the foreign tax jurisdiction as an offset against the amount of tax paid within its own jurisdiction.2.Tax credit with Deferral:-Taxation in the home country is deferred until earnings are of repatriated by the subsidiary to the Parent

company. Profits of the subsidiary are taxed at the ratePrevalent in the host country.3.Tax Exemption:-If profits of the subsidiary are taxed in the host country, they are exempted from any taxation in the home country

4.Deduction of tax paid abroad as expenditure:-The amount of tax paid in a foreign country is treated as expenditure and so it Is deducted from the total income arising in the country. 5.Investment credit:- In this method ,the amount of capital Invested abroad is deducted from the income arising in the country of residence .The purpose is to encourage capital exportthrough reducing the burden of taxes International Tax Management Strategy:-ITMS aims at maximising profit & minimising overall tax burden and involves 1.Trade off between retention & repatriation of profits by Subsidiaries. 2.Cost allocation among subsidiaries facing varyingtax rates .3.Decision to operate through either branches or subsidiaries

Transfer pricing Transfer pricing is intra-corporate transaction pricing where the prices are above/below the arm’s length

Price. Arm’s length prices are uncontrolled market price found In case of unrelated firmsMoney transfer prices aim at shifting pre-tax profits from a high tax counturry to a low tax one. Efficient transfer prices aim at maxmising output. The price of intermediate goods is designed to boost up the production multiplier so as to facilitate production in different units. Such designing of prices quite different from the arm’s length prices is known as efficient transfer prices . But shadow price aimed optimum allocation of resources among various units of firm. It shows maximum liquidity thanProfitability. Funds are transferred from cash surplus into cash

deficient Units of a firm through transfer pricing devices

Arm’s length prices are those prevailing in transactions between unrelated parties engaged in similar or the same trade under similar conditions in the open market or it is uncontrolled market Price found in case of unrelated firms. WORKING CAPITALWorking capital refers to investment in current assets. The current assets are :-1Cash, 2.Near cash assets, such as short -term marketable securities, 3. Bill receivables, 4.Inventory Including raw materials, semi –finished goods, & finished goods The firm’s current assets are known as circulating assetsbecause the value represented by these assets circulates among themselves. Eg. cash is used for buying raw materials which is

processed into finish goods. These are sold usually on credit &that creates bill receivables & converted into cash

Working c apital is often denoted in two ways. One is the gross working capital which is the sum of different current assets.

The other is the net working capital which means current assets minus current liabilities

Objectives:-1.Potimaisation of cash holdings in different units through Smoothening of the cross-boarder cash flows as well as in the firm as a whole2.Minimisation of finance transaction cost3.Avoidance of foreign exchange losses4.Minimisation of the tax burden of the firm

Exchange rate quotation :-The ratio between two currencies isknown as an exchange rate.The methods of quoting exchange rates are both direct and indirect .A direct quote gives home currency price of a certain amount of foreign currency ,usually one or 100 units. Eg.

Rs.35/us$ . In the case indirect quoting ,the value of one unit of home currency is presented in terms of foreign currency. If India adopts indirect quotation, the banks in India will quote theexchange rate as US$ 0.022857 /RsIf the quotation is published in a third country (Eg.London) to which neither of two currencies belongs ,the usual practice is put the stronger currency on the numeratorDirect quote places home currency on the numerator &indirectquote is just the opposite ie strong currency on the numerator

Problem :- If direct quote is Rs.45/US$, how can this exchange rate be Presented under indirect quote?

US $ 1 /Rs. 45 = US$ 0.0222 /RsBuying &selling rate :-Buying rate is bid rate &selling rate is askrate or offer rate. The bid rate is always given first ,followed by the ask rate. ie Rupee- US$ rate is Rs.54 -54.30 /US$Rs.54 is buying rate(bid price) & Rs.54.30 is selling rate (ask price) The difference between these two quotes forms the bank’s profit & is known as the spread .It is stated in the percentage terms Spread = (Ask price - Bid price ) / ask price X 100Problem:-Consider the following bid-ask prices.Rs.40-40.50/US$ Spread = (40.50 – 40.00 ) / 40.50 =0.0123 or 1.23 %The change in forward rates may be upwards or downwards. There is a

disparity arises between spot and forward rates .This is known as the swap or forward rate differential. If the forward rate is higher than the spot rate it would be known as forward premium

If the forward rate is lower than the spot rate is known as forward discount

Forward rate differential represents the difference of forward &Spot rates divided by spot rate Forward Premium (discount) =n-day forward rate –spot rate /spot rate x 360 /n Where n is the length of forward contract expressed in number

of daysProblem:-Find out the forward rate differential if spot rate of US$ is Rs.45.00 and one month forward rate is Rs.45.80 Ans ------360/30{ (45.80- 45.00) /45.00} x 100 =