Q4. Explore four key tax and exchange rate issues which Zara could face.…
Q4. Explore four key tax and exchange rate issues which Zara could face. (15 marks)
Tax issues Zara could face
Consider how this may effect Zara's global operations
Foreign exchange market
overcoming ex rate problems
Concepts in international tax system
Refroming international tax system is difficult
Countries do not like other interfering with their legislation to increase or lower taxes
Tax policy very technical and cooperation across borders difficult
Def: When two companies that are part of the same multi-national group trade with each other and establish a price for the transfer. (Tax Justice Network, p31 Reader)
Transfer mis-pricing: Manipulating or abusing the transfer price for the company's benefit i.e. lowering or avoiding tax
Tax Justice Network, p31 Reader)
Arms length principle: Two unrelated companies trade and a market price is established.
Hard to enforce. Some use it faithfully, others do the complete opposite. When there's no market for a bespoke product or service a market price cannot be obvious.
Unitary Taxation with profit apportionment
Taxing the various parts of the muti-national based on what it's doing in the real world, substance over legal system
Muti-nationals seen as a unit the the whole income is apportioned out to the countries where each subsidiary is located.
3 obstacles to implementation:
Concepts in exchange rate fluctuations for businesses
Foreign exchange market
Value of currency effects firms in many ways
If home currency is strong against a foreign currency it shows there is high demand for products in that currency.
If home currency is strong against foreign currency the company can import materials, products or resources cheaply.
however it will cost cost foreign companies more to buy the home company products which is not favourable for exporters as the companies they sell to may look for cheaper options elsewhere. But what they do sell will have higher profit margins.
If a home currency is weak against a foreign currency it shows there is not as much demand for the products in that currency.
If a home currency is weak against a foreign currency it will have to pay more to import materials, products or resources.
However, it will be cheaper to sell products abroad which could be good news for exporters if they sell high numbers of units as they could make profit that way but if they have spent a lot on imports such as materials their profit margins will suffer.
Zara may want to shift their profits to Zara in Spain as the total tax they would pay is much lower than in China itself.