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I. THE VALUE OF THE MULTINATIONAL FINANCIAL SYSTEM

I. THE VALUE OF THE MULTINATIONAL FINANCIAL SYSTEM

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THE VALUE OF THE MULTINATIONAL

FINANCIAL SYSTEM

A.



Tax Arbitrage

1. Wide variations exist in

global

tax systems

2. Firms reduce taxes paid

-move funds to low-tax

jurisdiction

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THE VALUE OF THE MULTINATIONAL

FINANCIAL SYSTEM

B. Financial Market Arbitrage

1. Assume imperfect markets

because

a. Formal barriers to trade

exist

b. Informal also exist

c. Imperfections in domestic

capital markets exist.

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THE VALUE OF THE MULTINATIONAL

FINANCIAL SYSTEM

C.



Regulatory Arbitrage

1.

Arises when subsidiary profits

vary due to local regulations.

2.

Example:

a.

Government price controls

b.

Union wage pressures, etc.

3.

Firms may disguise true profits

in order to gain better

negotiations

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II. INTERCOMPANY FUND-FLOW

MECHANISMS: COSTS AND BENEFITS

II.INTERCOMPANY FUND-FLOW

MECHANISMS

A. MNC Policy:

Unbundling

breaks up a total international

transfer of funds between pairs of

affiliates into separate components.

B. Example:

Headquarters breaks down charges

for corporate overhead by affiliate.

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INTERCOMPANY FUND-FLOW

MECHANISMS: COSTS AND BENEFITS

C.

Inter-company Fund Flows

1. Tax Factors:

a. Taxes available on

1.) corporate income

2.) personal income

(includes dividends)

b. U.S. Tax System

tax income remitted abroad

on corporate income tax.

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I. THE VALUE OF THE MULTINATIONAL FINANCIAL SYSTEM

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