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Tax considerations and exchange rates (Types of taxes (Profit/corporate…
Tax considerations and exchange rates
Paying taxes
Records the taxes and mandatory contributions that a small and medium-size company must pay in a given year, as well as measuring the administrative burden of paying taxes and contributions
Types of taxes
Profit/corporate income tax
Social contributions and labour taxes paid by the employer
Property taxes
Property transfer taxes
Dividend tax
Capital gains tax
Financial transactions tax
Waste collection tax
Vehicle and road tax
Tax rates and multinational corporations
Cross boarder tax rules
Developed in 1920s
Tied to concepts of geography and national boundaries
Changes have made it difficult for governments to collect all the tax receipts they believe are owed
Technological changes over the past 100 years
Changes to international trade structures
Reforming international tax policy is difficult for 2 reasons
Tex policy is very technical and achieving cross-border tax cooperation is difficult
Countries jealousy guard their ability to raise (or lower) taxes and do not like other countries and agencies interfering with their domestic tax legislation
Tax avoidance
Companies have used a number of schemes to shift profits across borders to take advantage of tax rates that are lower than in the country where they made the profit
This is legal
However many countries began to be concerned about what they perceived to be harmful tax practices in the wake of the Global Financial Crisis (GFC) of 2008/09
Tax evasion
This is illegally
Not reporting income
Reporting expenses not legally
Not paying taxes owed
The legacy of the GFC and increased public austerity moved international tax issues onto the global political agenda
Organisation for Economic Co-operation and Development (OECD) released its final version of an Action Plan to combat what is called ‘Base Erosion and Profit Shifting’ (BEPS).
Base erosion
Refers to the erosion of national tax bases
Profit shifting is one way that this happens
Many countries wanted to find a solution to BEPS and international tax avoidance techniques used by high-profile multinationals.
The publication of the 1,600 page report in October 2015 with 15 BEPS ‘Action’ items was a rare example of the international community working quickly together
Base erosion and profit shifting (BEPS)
Refers to corporate tax planning strategies used by multinationals to "shift" profits from higher–tax jurisdictions to lower–tax jurisdictions, thus "eroding" the "tax–base" of the higher–tax jurisdictions
New tax reporting requirements for large MNCs from 2016
Country by country reporting
Details on each entity
Organised by country
Data to include; revenues, profits, taxes, assets, employee numbers and costs, capital, accumulated earnings and intercompany payments
Master file
Standardised information for all group members:
Global organisational structure
Description of business
Intellectual property (IP) development, use and transfers
Intercompany financial agreements
Financial and tax positions
Local files
Transaction details between local entities and affiliates such as
The local management team
Business strategy
Restructurings or IP transfers
Exchange rate issues for business
The implications of exchange rate movements and international capital flows are vitally important for all businesses.
Volatile exchange rate can affect the value of companies' assets and liabilities denominated in foreign currencies and their operating profit
Small businesses and the perils of international trade
It is difficult for small businesses to compete with large multinational corporations with all their international connections
Trying to find a niche market
To offer some specialist service (perhaps to MNCs)
They struggle with the fluctuations in exchange rates
In 2002, the main financial factor causing problems for SMEs, easily topping the list was high exchange rate of sterling against the euro
47% of a sample said that this was very problematic
Difficult for those whom export
A rise in the exchange rate of those who rely on imported components and the increase in price may force companies to pass this onto their customers, making them less competitive
In 2008, the £ plummeted, which was a golden opportunity for exporters
See mindmap on the foreign exchange market