International Business on an international stage.

Rick Politician
87345
6/2/2007
I BUS 300
Chapter 19-20 Homework
a.
The accounting system in China is based on the Soviet system with the purpose of measuring production and tax for the government, not to measure the financial status of domestic businesses at home and abroad.  Since there are only 25,000 accountants, financial managers and auditors in China the accounting system is largely supplemented from international accounting firms with more human capital.  Due to their culture, the Chinese government has decided not to base their accounting system on any other country’s accounting system.  This slows down the development of the Chinese accounting system and keeps the system at the current levels of accuracy and usefulness.

b.
Firms can use tax havens to reduce their tax liability.  As firms incorporate themselves in countries with a small or no corporate income tax, they avoid double taxation.  Most governments don’t require foreign subsidiaries to pay the income tax until they subsidiary sends dividends to the parent company.  Yet, in a growing subsidiary, all money can be reinvested in the subsidiary and never taxed.

Host governments often do not tax royalties, money firms usually obtained through licensing, but treat them as tax-deductible parts of running a business.  When the tax rates are higher in the host country, this allows the parent company to save money by using their lower local tax rate.

Firms can also use transfer pricing as a strategy to decrease tax liability.  Transfer pricing involves sending goods from some subsidiaries to other subsidiaries and assigning different values to the goods depending on where they are sent.  This allows firms to avoid taxes through transferring value to subsidiaries in countries with lower tax rates.

Fronting loans occur when parent companies give money to international banks, which loan that money to the parent company’s subsidiary.  This allows subsidiaries to get around host country limits on remittances to parent companies on the basis of the subsidiary is paying of an international loan.  The interest the subsidiary pays is tax deductible and the parent company receives tax-free interest.

Our way of living is based on a belief that capitalistic actions will create a greater good for everyone.  By companies exploiting these opportunities, they act in their best capitalistic interests.  According to capitalism, these companies are therefore benefiting society by exploiting the tax benefits.