Exam 20: Financial Management and Accounting in the Global Firm

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a. Through trade credit, a subsidiary can defer payment for goods and services received from the parent company. Credit terms tend to be longer in foreign markets (90 days) compared to the United States (30 days).
b. Dividend remittances are a common method for transferring funds from foreign subsidiaries to the parent, but vary for each subsidiary depending on factors such as tax levels and currency risks. For instance, some host governments levy high taxes on dividend payments, which discourages MNEs from using this approach. Governments can also limit how much MNEs can be remitted.
c. Transfer pricing refers to prices that subsidiaries and affiliates charge one another as they transfer goods and services within the same MNE. Firms can use transfer pricing to shift profits out of high-tax countries into low-tax countries; minimize foreign exchange risks, and optimize the management of internal cash flows.
d. Royalty payments are remuneration paid to the owners of intellectual property. Assuming the subsidiary has licensed technology, trademarks, or other assets from the parent or other subsidiaries, royalties can be an efficient way to transfer funds. Also, because they may be viewed as an expense, royalties are tax-deductible in many countries. The parent MNE can collect royalties from its own subsidiaries as a way of generating funds.
e. A fronting loan is a loan between the parent and its subsidiary, channeled through a large bank or other financial intermediary. Fronting allows the parent to circumvent restrictions that foreign governments impose on direct intracorporate loans. If the loan is made through a bank in a tax haven-a country hospitable to business and inward investment because of its low corporate income taxes-the parent can minimize taxes that might be due if the loan were made directly. While some countries restrict international funds transfers in order to keep money within their borders, such restrictions usually do not apply to the repayment of bank loans.
f. Multilateral netting is another method for funds transfer within the MNE. It amounts to strategic reduction of cash transfers within the MNE family through the elimination of offsetting cash flows.