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International Finance Organisations - Coggle Diagram

- - - - Tax policy is very complex and difficult to manage cross border
      - countries like to control their own tax legislation
    - - Arms Length Principle - Related companies should be trading with each other as if they were unrelated i.e. at arms length to avoid the possibility of transfer pricing.
      - Arms length principle difficult to implement even in ideal circumstances with the best intentions.
    - - Multinationals favour the arms length principle as the basis for determining transfer pricing, as it allows them a lot of leeway to minimise tax, an alternative approach is combined reporting with formulary apportionment and unitary taxation.
      - Involves taxing the various parts of a multinational based on what its doing in the real world
      - formula allocates profits based on various factors (sales, assets etc). Would prevent a one-man office in the cayman islands from shifting billions in profit around as it would allocate the cayman islands a very small portion based on payroll and assets.
      - The aim is to tax multinationals income without reference to their internal organisational structure
      - Obstacles
        
        path dependency - great resistance to changing the way things are done but could be overcome gradually
        
        Vested interests - multinationals have a significant interest in maintaining the status quo
        
        Technical issues - tax law is complex especially when working across jurisdictions
      - similar to country by country reporting
        developed by Richard Murphy
      - Would Require the following
        from multinationals
        
        1 The name of each country in which it operates.
        
        2 The names of all its subsidiaries and affiliates in each country in which it operates.
        
        3 The performance of each subsidiary and affiliate in every country in which it operates, without exception.
        
        4 The tax charge included in its accounts of each subsidiary and affiliate in each country in which it operates.
        
        5 Details of the cost and net book value of its fixed assets located in each country in which it operates.
        
        6 Details of its gross and net assets for each country in which it operates.
    - - GFC and austerity elevated international tax in the public agenda.
        Corporate tax avoidance (estimated to cost countries up to US$250 billion annually) is a concern to developed and developing countries.
      - New Requirements
        from 2016
        
        Country-by-country reports – Details on each entity, organised by country; data to include revenues, profits, taxes, assets, employee numbers and costs, capital, accumulated earnings, and intercompany payments, filed in the headquarters’ jurisdiction.
        
        Master file – Standardised information for all group members: global organisational structure; description of business; Intellectual Property (IP) development, use, and transfers; intercompany financial arrangements; and financial and tax positions, led in each country with operations;
        
        Local files – Transaction details between local entities and affiliates, such as the local management team, business strategy, and restructurings or IP transfers, led in each country with operations.
- - - - increase in UK interest rates relative to the returns available elsewhere which attracts foreign investors searching for high returns in UK banks
      - a belief by speculators that the pound will increase in value in the future (can be a major factor)
      - increase in overseas incomes - the more income elastic demand is, the greater the shift will be
    - - Increase in UK income leading to more demand for imports
      - Increase in overseas interest rates leading money to flow from the UK to abroad in search of higher returns
      - Speculators selling £ in the belief that it will fall in value (can be self fulfilling prophecy)
  - - - target markets that use the same currency
      - operate in multiple overseas markets to reduce risk by spreading out potential pitfalls
      - buy currency in advance at a pre set price so they guarantee the exchange rate (futures market)
      - speculate in currencies to try to offset unfavourable movements
      - set contracts in their own currency
    - - The impact of a change in exchange rate will depend on:
        
        what proportion of its sales are exported
        
        what % of inputs are imported
        
        degree of competition from overseas businesses
        
        value and direction of how much value the currency has changed against the currencies in its import/export markets
        
        price elasticity of demand for exports and imports
        
        availability of alternative markets to export to or other suppliers to switch to
  - - - no transaction costs from converting one currency to another
      - no need to worry about currency fluctuations within the eurozone, making planning easier and providing greater stabilitty
      - easier to compare price of suppliers
    - - giving up your own currency can be politically unpopular
      - accepting eurozone interest rates which may not be aligned with the wishes of all countries (ie. give up control of domestic interest rates)
      - accepting a currency value determined by countries behaviour that isn't yours