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intern
ation
al bu
siness, 5
th edition
chapter 19international 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
LegalSystem
EconomicSystem
AccountingStandards
and Practices
Sourcesof
Capital
InternationalPolitical
Ties
CulturalValues andAttitudes
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
Temporalmethod
19-13
Table 19.2 Parent’s Ownership Stake and Accounting Treatment of Its Foreign Investments
Ownership Stake Method Used
Less than 10 percent Cost method
Between 10 and 50 percent
Equity method
More than 50 percent Consolidation 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
GOAL TECHNIQUE EFFECT
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