Usually, one of the most important variables in multinational operations is taxation. Perhaps no environmental variable, with the possible exception of foreign exchange, has such a pervasive influence on all aspects of multinational operations as taxation: (1) the choice of location in the investment decision, (2) the form of the new enterprise, (3) the method of finance, and (4) the method of transfer pricing.
International taxation is complicated because tax laws differ among countries and are constantly changing. Hence, it is not accidental that international taxation still remains somewhat of a mystery for many international executives. For example, multinational financial managers need to understand the following:
1 Shareholders of foreign and domestic corporations are subject to different rules.
2 Accounting for foreign taxes on foreign operations is not identical to that on domestic operations.
3 Bilateral tax treaties and foreign tax credits exist to avoid double taxation of income.
4 Many countries offer a number of tax incentives to attract foreign capital and know-how.
5 Tax savings realized in low-tax countries may be offset by taxes on undistributed earnings.
There are many such added complexities because governments have failed to come to any general agreement on tax policies. Each country has its own tax philosophies, tax incentives, transfer pricing policies, and the like. Multinational financial managers must sort them out in order to maximize profitability and cash flow. To attain this end, they must acquaint themselves with the overall tax environment.
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