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CHAPTER 18 H ost-Country Regulation: Corporate Law, Taxation, and Currency Risk. Host- Country Corporate Law Affecting Foreign Investment. Host country corporate law can impact the “bottom line”: - PowerPoint PPT Presentation
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Copyright © 2009 South-Western Legal Studies in Business,
a part of South-Western Cengage Learning.
CHAPTER 18 CHAPTER 18 HHost-Country Regulation: Corporate ost-Country Regulation: Corporate Law, Taxation, and Currency RiskLaw, Taxation, and Currency Risk
2Copyright © 2009 South-Western Legal Studies in Business,
a part of South-Western Cengage Learning.
Host- Country Corporate Law Host- Country Corporate Law Affecting Foreign InvestmentAffecting Foreign Investment
• Host country corporate law can impact the “bottom line”:– What is the host country does not allow repatriation of
money back to foreign investor’s country?– What if employment boards are run by a majority of
host-country ‘insiders’?
• Most countries now regulate investment to try to balance investment with local growth and control.
3Copyright © 2009 South-Western Legal Studies in Business,
a part of South-Western Cengage Learning.
Minority Ownership: PassiveMinority Ownership: Passive
• Investor limits herself to equity or debt financing.• Equity:
– American Depository Receipts certificates held by U.S. trust institution representing stock held by bank in foreign country.
– EU Prospectus Directive.• Legal issues: insider trading (different
definitions), national legislation.
4Copyright © 2009 South-Western Legal Studies in Business,
a part of South-Western Cengage Learning.
Minority Ownership: ActiveMinority Ownership: Active
• Joint Venture forms:– Foreign corporation.– Foreign partnership. – U.S. corporation with foreign branch.– U.S. partnership with foreign parties.
• National restrictions may exist on foreign participation.– Example: U.S. restriction on foreign nationals
involved in defense contractors.
5Copyright © 2009 South-Western Legal Studies in Business,
a part of South-Western Cengage Learning.
Majority Ownership and SubsidiariesMajority Ownership and Subsidiaries
• Reason: Foreign company can exercise greater control, but some countries either forbid 100% foreign ownership or impose high taxes.
• Option: create a foreign branch subsidiary.
6Copyright © 2009 South-Western Legal Studies in Business,
a part of South-Western Cengage Learning.
What Is the Difference Between a What Is the Difference Between a Subsidiary and a Branch?Subsidiary and a Branch?
• Control.• Tax.• Liability.• When might you consider a branch first?
7Copyright © 2009 South-Western Legal Studies in Business,
a part of South-Western Cengage Learning.
Tax Issues: Tax Issues: Bank of America v. U.S.Bank of America v. U.S.
• Foreign tax credits - in the U.S. you get credit on U.S. income tax on foreign taxes paid. See the Bank of America Nat’l Trust & Savings Assn. v. United States case. Holding: BOA petition dismissed tax credits appeal.
8Copyright © 2009 South-Western Legal Studies in Business,
a part of South-Western Cengage Learning.
Tax Issues: E-CommerceTax Issues: E-Commerce
• Should the internet be a “tax free” zone?• Great variation among regions:
– All EU purchases subject to a VAT tax, from 15-25%.– EU treats downloadable music as a “service.”
• Transfer pricing - to prevent tax evasion require intercompany transactions at arms length prices.
9Copyright © 2009 South-Western Legal Studies in Business,
a part of South-Western Cengage Learning.
Tax IssuesTax Issues
• Foreign sales corporation - legal mechanism to reduce taxes. See the Compaq Computer case.
• U.S. Enforcement of Foreign Tax Laws. – David B. Pasquantino v. United States: Supreme
Court held that Department of Justice has the power to prosecute Americans for the evasion of foreign tax laws.
10Copyright © 2009 South-Western Legal Studies in Business,
a part of South-Western Cengage Learning.
Foreign Control IssuesForeign Control Issues
• Virtually every country prohibits foreign entities in sensitive sectors.
• US outlaws foreign investment in “national security” fields such as telecommunications, air transportation, and military procurement.
• Mexico has now changed its laws to allow up to 100% foreign investment.
• Investor reaction to limits has always been negative.
11Copyright © 2009 South-Western Legal Studies in Business,
a part of South-Western Cengage Learning.
Controlling Currency RiskControlling Currency Risk
• Inconvertibility: make agreement with government regarding currency exchange results & import substitution rights.
• Minimizing Fluctuation Risks: Currency Swaps.• Arrangements with the Soft-Currency Country.• Payment and Price Adjustment Approaches.
12Copyright © 2009 South-Western Legal Studies in Business,
a part of South-Western Cengage Learning.
Controlling Currency RiskControlling Currency Risk
• Structuring of Hard-Currency Obligations and Revenues.
• Countertrade.– Counterpurchase.– Barter.– Offsets.– Buy-Back.
• Consortia or parallel exchange.