international business, 5 th edition chapter 19 international accounting and taxation

19-2 Chapter Objectives 1 Discuss the various factors that influence the accounting systems countries adopt Describe the impact these national accounting differences have on international firms Analyze the benefits to international firms of harmonizing differences in national accounting systems

19-3 Chapter Objectives 2 Describe the accounting procedures used by U.S. firms engaged in international business Identify the major international taxation issues affecting international businesses

19-4 Chapter Objectives 3 Discuss the taxation of foreign income by the U.S. government Assess the techniques available to resolve tax conflicts among countries

19-5 Accounting System The goal of an accounting system is to identify, measure, and communicate “economic information to permit informed judgments and decisions by users of the information.”

19-6 Figure 19.1 Influences on a Country’s Accounting System Legal System Economic System Accounting Standards and Practices Sources of Capital International Political Ties Cultural Values and Attitudes

19-7 Differences in Country Accounting Systems Reported income and profits Tax reporting Desire to operate in a given country Valuations of assets and inventories Use of accounting reserves

19-8 Other National Accounting Differences Capitalization of financial leases Preparation of consolidated financial statements Capitalization of research and development expenses Treatment of goodwill

19-9 Efforts at Harmonization International Accounting Standards Committee (IASC) formed in 1973 International Accounting Standards Board (IASB) in 2001 –120 accounting societies in 91 countries –International Accounting Standards –Goal: to promote comparability of financial statements across countries

19-10 Accounting Problems in International Business Activities Accounting for transactions denominated in foreign currencies Reporting the operating results of foreign subsidiaries in the firm’s consolidated financial statements

19-11 Treatment of Foreign Investments Cost method Equity method Consolidation method

19-12 Methods for Translating Subsidiary Financial Statements Current rate method Temporal method

19-13 Table 19.2 Parent’s Ownership Stake and Accounting Treatment of Its Foreign Investments Ownership StakeMethod Used Less than 10 percentCost method Between 10 and 50 percent Equity method More than 50 percentConsolidation method

19-14 Table 19.3 Translation of Income Statement of Japanese Subsidiary of U.S. Firm Using the Current Rate Method

19-15 Table 19.4 Translation of Balance Sheet of Japanese Subsidiary of U.S. Firm Using the Current Rate Method

19-16 Methods of Reducing Overall Tax Burden Transfer Pricing –Prices one branch or subsidiary of a parent charges a second branch or subsidiary for goods or services Tax Havens –Locate activities in countries that impose little or no corporate income taxes

19-17 The Bahamas has flourished because of its status as a tax haven.

19-18 Transfer Pricing Intracorporate transfers are common Influence on ability to monitor performance Influence on taxes paid at home and abroad

19-19 Calculating Transfer Prices Market- based method Nonmarket- based method

19-20 Table 19.5 Strategic Use of Nonmarket-Based Transfer Prices GOALTECHNIQUEEFFECT Decrease tariff paid on components imported from subsidiary Lower transfer price charged by subsidiary Lowering the price on which an ad valorem tariff is based decreases total amount of import tariff Decrease overall corporate income tax Raise transfer prices paid by subsidiaries in high-tax countries and/or lower transfer prices charged; lower transfer prices paid by subsidiaries in low-tax countries and/or raise transfer prices charged Reported profits of subsidiaries in high-tax countries decrease, and reported profits of subsidiaries in low-tax countries increase; total corporate tax burden decreases Repatriate profits from a subsidiary located in a host country that blocks repatriation Raise transfer prices paid by the subsidiary; lower transfer prices charged by the subsidiary Cash flows from the subsidiary to other units, circumventing restriction on repatriation

19-21 Taxation of Foreign Income by the U.S. Taxation of Exports Taxation of Foreign Branch Income Taxation of Foreign Subsidiary Income

19-22 International Tax Conflicts Tax credits ‘Bashing’Tax treaties