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8/7/2019 Aktin Present

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Nama Nim

Eka W Silitonga

Erin Y Sinaga

Moren Silaban

080503126

080503141

090503


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Differences in overall tax burden are important ininternational business. Various statutory rates of income taxationare an important source of these differences. However, differences

in tax rates tell only part of the story. Many other considerationmay significantly affect the effective tax burden for multinationalenterprise. Differences in national definition of taxable income areimportant.

Consider depreciation. In theory, a portion of the cost of an

asset is said to expire as the asset is used up to produce revenue. Inkeeping with the matching principle, this expired cost is recognizedas an expense and deducted from its related revenue. Where theasset is consumed equally in each reporting period, an equalportion of its cost is commonly expensed each period for externalfinancial reporting purposes.


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National tax assessment systems also affect relative taxburdens. Several major systems are currently in use. For

simplicity, we will only consider the classical and integratedsystems.

Under the classical system, corporate income taxes ontaxable income are levied at the corporate level and theshareholder level. Shareholder are taxed either when the

corporate income is paid as a dividend or when they liquidatetheir investment. When a corporation is taxed on incomemeasured before dividends are paid, and shareholders arethen taxed on their dividends, the shareholders dividendincome is effectively taxed twice.


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Under an integrated system,corporate and

shareholder taxes are integrated so as to

reduce or eliminate the double taxation ofcorporate income.The tax credit or

imputation system is a common variant of

the integrated tax system.


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Countries eager to accelerate their economicdevelopment are keenly aware of the benefits of internationalbusiness. Many countries offer tax incentives to attract

foreign investment. Incentives may include tax-free cashgrants applied toward the cost of fixed assets of newindustrial undertakings or relief from paying taxes for certaintime periods (tax holidays). Some countries, particularly thosewith few natural resources, offer permanent tax inducements.These countries include:

The Bahamas, Bermuda, and the Cayman Islands, whichhave no income taxes at all.

Vanuatu, which very low income tax rates.

Hongkong and Panama, which tax locally generated incomebut exempt income from foreign sources.


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Tax holidaysThe term tax holiday refers to an incentive

used by a government that partially orcompletely exempts a taxpayer for a period

of time.Many Asian countries offer tax holidays to

foreign companies.

The primary reason for offering tax holidaysis to encourage foreign investment.


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Signatories to such treaties generally agree on how taxes andtax incentives will be imposed,honored,shared,or otherwiseeliminated on bussiness income earned in one taxing

jurisdiction by citizens of another Thus,most tax treaties between home and host countries

provide that profits earned by a domestic enterprice in thehost country shall be subject to its taxes only if theenterprise maintains a permanent establisment there.

Tax treties also affect witholding taxes ondividends,interest,and royalties paid by the enterprise of onecountry to foreign shareholders. They usually grant resiprocalreductions in witholding taxes on dividends and often entirelyexempt royalties and interest from witholding.


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The Location of a production and distribution systemalso offer tax advantages. Thus finals sales of goods orservices can be channeled through affilities located injurisdiction that offer tax shelter or defferral.

A manufacturer in a high tax country can obtaincomponents from affiliates located in low-tax countriesto minimize corporate taxes for the group as a whole. Anecessary element of such a strategy is the prices atwhich goods and services are transferred between groupcompanies.

Profits for the corporate systems as a whole can beincreased by setting high transfer prices on componentsshipped from subsidiaries in relatively low taxcountries,and low transfer prices on componentsshipped from subsidiaries in relatively high tax

countries.


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Market vs. Cost vs. .?

The use of market-oriented transfer prices offers severaladvantages. Market prices show the opportunity cost to thetransferring entity of not selling on the external market, and their usewill encourage the efficient use of the firms scarce resources. Their useis also said to be consistent with a decentralized profit centerorientation. Market prices help differentiate profitable fromunprofitable operations, and are easier to defend to taxing authoritiesas arms-length prices.

Arms-Length PrincipleThe typical multinational is an integrated operation: Its subsidiaries

are under common control and share common resources and goals.The need to declare taxable income in different countries means thatmultinationals must allocate revenues and expenses amongsubsidiaries and set transfer prices for intrafirm transactions.


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Comparable Uncontrolled Price Method

Under this approach, transfer prices are set by reference toprices used in comparable transactions between independent

companies or between the corporation and an unrelated thirdparty. It is appropriate when goods are sufficiently common thatcontrolled sales are essentially comparable to sales on the openmarket. Comodity-type products ordinarily use this method forinternal transactions.

Comparable Uncontrolled Transaction MethodThis method applies to transfers of intangible assets. It

identifies a benchmark royalty rate by referencing uncontrolledtransactions in which the same or similar intangibles aretransferred. Like the comparable uncontrolled price method,this method relies on market comparable.


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Resale Price Method

This method calculates an arms-length price by starting with the final

selling price at which the item in question is sold to an uncontrolled third

party. An appropriate margin to cover expenses and a normal profit is then

deducted from this price to derive the intracompany transfer price. This

method is typically used when the unit buying the item is a distributor or sales

subsidiary.

Cost-Plus Pricing Method

Cost-plus pricing method is a work forward approach in which a markup is

added to the transferring affiliates cost in local currency. The markup typicallyincludes (1) the imputed financing costs related to export inventories,

receivables, and assets employed and (2) a percentage of cost covering

manufacturing, distribution, warehousing, internal shipping, and other costs

related to export operation. An adjustment is often made to reflect any

government subsidies that are designed to make manufacturing costs

competitive in the international marketplace.


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Comparable Profits Method

The comparable profits method supports the general notion that similarlysituated tax-payers should earn similar returns over reasonable time periods.Thus, intercompany profits on transactions between related parties should becomparable to profitson transactions between unrelated parties who engage insimilar business activities under similar circumstances. Return on capitalemployed(ROCE) is a primary profit-level indicator. Under this approach, theoperating income to average capital employed ratio of a benchmark entity iscompared with the ROCE of the entity in question.

Profit-Split Methods

Profit-split methods are used when product or market benchmarks are notavailable. Essentially they involve dividing profits generated in a related-partytransaction between the affiliated companies in an arms-length fashion. Onevariant of this approach, the comparables profit-split method, divides the profitgenerated by a related-party transaction using a percentage allocation of thecombined profits of uncontrolled companies with similar types of transactionsand activities.

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