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Session 6: Tax considerations and exchange rates - Coggle Diagram
Session 6: Tax considerations and exchange rates
International tax rates
PWC collect data explaining how 190 countries choose to tax companies
Tax competition across countries to entice business
Transfer Pricing
when two companies that are part of the same
multinational group trade with each other and establish a price for the transaction
not necessarily illegal, however easy to manipulate and abuse. Known as transfer mispricing
est. 60-70% of international trade happens within multinationals
est. billions of dollars of tax loss due to transfer mispricing
Arm's length principle
two unrelated companies trade and agree market price
multinationals may wish to distort market price to avoid tax in certain countries
difficult to monitor and lots of opportunity for deliberate mispricing
Unitary taxation
with profit apportionment
aim is to tax portions of a multinational
company
formula based on sales and payroll would allocate profits accordingly across all operating countries
billions could be saved on tax enforcement
3 main obstacles
path dependency
resistance to change and complications related to reformation
vested interests
multinationals will have resistance
technical issues
complexities around technical implementation
Exchange rate issues for business
Falling £ good for companies exporting, makes products cheaper.
Falling £ increase import costs, could increase inflation
strong £ bad for companies exporting, makes product more expensive.
strong £ decreases import costs
Demand and supply of pounds in the foreign market
strong demand = reduction in quantity requested
slope of demand curve depends of price elasticity - defined by uniqueness, brand power, quality and reliability
strong £ = increase in foreign supply being demanded
changes rapidly trying to stable equilibrium
McBurger Index
Created by the economist to clarify whether currency is over/under-valued
Compares actual exchange rates with figures required to keep price of McDonald's burger the same globally.
known as Purchasing power parity (PPP)
Overcoming exchange rate issues
Target markets that use the same currency
Operate in several overseas markets - currency changes might offset each other
buy currency in advance at set price
set contracts in home currency
Impact of the exchange rate
what proportion of its sales are exported;
. what proportion of its inputs are imported;
. the degree of competition in the market from overseas businesses;
. how much the value of the currency has changed (and in what direction) against the currencies in its exports and import markets;
. the price elasticity of demand for exports and imports;
. the availability of alternative markets to export to or other suppliers to switch to.
Government intervention in the foreign
currency markets
Can increase currency value by buying its own currency using foreign currency reserves, or increasing interest rates