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