international finance and banking in Asia

INTERNATIONAL TAX ENVIRONMENT AND TRANSFER PRICING

Taxation is relevant in finance:- as cash outflow- as value component. It is also relevant as competitive advantage (i.e. the very origin of company value) because the company has to provide return to the capital market and the higher the tax rate, the lower the return the company has to pay to the capital market. Return = fcff - taxes. This kind of competition is not perfect.

Tax environment

Two main objectives of taxation:

• Tax neutrality: has its foundation in the principles of economic efficiency and equity.
• Tax equity:

Tax neutrality, three criteria:

• Capital-export neutrality: no effect on economic decision-making process (worldwide economic efficiency), the decision process is not modified by the taxation process. It is the criterion that an ideal tax should be effective in raising revenue for the government and not have any negative effects on the economic decision-making process of the taxpayer.
• National neutrality: income is taxed

in the same manner regardless where it is earned, so inside a given country it doesn’t matter when you earn your profit, you pay the same taxes;

- Capital-import neutrality: government follows the taxation policies of foreign tax authorities on the foreign-source income of its resident MNCs, it means that if the tax rate inside my country is different from the taxation rate of the foreign country I ask to pay the difference between the two taxation.

Tax equity:

- is that all similarly situated taxpayers should participate in the cost of operating the government according to the same rules, it means that taxes are due in order to let the government manage the country, so the idea of equity is that each player inside the country should participate to help the government paying taxes.

- (i.e. the same tax rate and tax due date apply regardless of the country in which an affiliate of a MNC earns taxable income)

Types of taxation

Income Tax:

- The simplest one, is the tax that any company has

To pay on the profit of the company.

Is a direct tax, that is, one that is paid directly by the taxpayer on whom it is levied.

Tax rate is different from country to country (from 8% to 55%).

Legislation can choose some costs that are not deductible. For example, if you have a car that you only use for work, maybe 30% of the price is deductible. If you use it also in your private life, it is not deductible.

Withholding tax:

Is a tax generally levied on passive income earned within the jurisdiction of another country (i.e. dividend and interest income). For example, if your company, located in Italy, controls another company in China, and the local foreign company (China) makes a profit, the company pays income taxes in China. However, if the company pays dividends to the foreign company, it usually does not pay the full amount of the dividend but rather that amount minus the withholding tax.

Withholding tax can be seen as a sort of protectionism that countries use to make a profit. It is an element that affects competition in different countries.

of taxes. That's why MNCs once used to locate in tax havens. Nowadays almost every country has introduced rules to reduce MNC tax avoidance.

Tax heavens are countries that have low corporate income tax rates and low withholding tax rates on passive income.

Transfer prices, tax rates, import duty, and net profit:

• Import duty (by the country with the higher taxation rate) reduces the profitability of tax arbitrage. The country with the higher tax rates has to pay an import duty, so its revenue is lower.
• Bilateral agreements between countries are frequent, like advance pricing agreement (APA). MNCs can use those agreements also for triangulations.
• Other arbitrage opportunities are present. Just think about:

• Introducing royalty fees
• Adopting local leverage policies

OECD:

The mission of the Organisation for Economic Co-operation and Development (OECD) is to promote policies that will improve the economic and social well-being of people around the world.

OECD and G20 countries along with

Developing countries that participated in the BEPS (Base Erosion and Profit Shifting) development of the Package are establishing a modern international tax framework under which profits are taxed where economic activity and value creation occur.

Work will be carried out to support all countries interested in implementing and applying the rules in a consistent and coherent manner, particularly those for which capacity building is an important issue.

The BEPS package provides 15 Actions that equip governments with the domestic and international instruments needed to tackle BEPS.

Countries now have the tools to ensure that profits are taxed where economic activities generating the profits are performed and where value is created.

These tools also give businesses greater certainty by reducing disputes over the application of international tax rules and standardising compliance requirements.

China - response to BEPS

Chinese tax authorities make reference in transfer pricing administration to concepts

1. Location Specific Advantages (LSA)

So they will call for transfer pricing comparability adjustments, thus leading China to different conclusions about the contribution of international group members to intangible value creation. 38 di 53

2. International companies are re-evaluating the sustainability of their traditional Chinese transfer pricing positions.

INTERNATIONAL BANKING AND MONEY MARKET

International banking services

They provide international services for import and export, arranging trade financing and foreign exchange needs for cross-border transactions and foreign investments.

The major features that distinguish international banks from domestic banks are the types of deposits they accept and the loans and investments they make.

They also:

• Assist clients in currency risk management;
• Trade foreign exchange and foreign exchange products;
• Borrow and lend in the Eurocurrency market;
• Participate to international loan syndicates (is an agreement among

bank's correspondents.

Foreign Branches: operates like a local bank, but is part of the parent one. Provides a wide range of services. Also if it is a branches is under control of the domestic law.

Subsidiary and Affiliate Banks: are locally incorporated banks and work under the local law. Are independent bank control by the domestic one.

Edge Act Banks: are federally chartered subsidiaries of U.S banks that are physically located in the United States and are allowed to engage in a full range of international banking activities.

Offshore Banking Centers: exist in those countries whose banking system permit the existence of external accounts beyond the normal economic activity in the country. Banks operate as branches of the parent bank. Usually have a very easy legislation, they are under weak control.

International Banking Facilities: a separate set of asset and liability accounts that are segregated on the parent bank's books. It's frequent in not developed country.

wherecompanies have a lot of business.

International money market

Is not a physical market, is just made of borrow and lending activities.

Eurocurrency is a time deposit in a multinational bank located in a different country fromthe country that issued the currency. It is mainly an interbank market.

Eurobanks are those accepting Eurocurrency deposit. They quote interbank bid-offeredrates of interest like LIBOR and EURIBOR.

Eurocredits are short to medium term loans of Eurocurrency extended to corporations,governments, non prime banks, international organizations. They are very large andusually syndicate (is not the single bank). Multinational company would like to have a bigamount of money to be issued to the domestic market can arrange to make an issue ineurocredit market so that the all big international bank can participate to the loan andsatisfy the big request of money.

FRA (forward rate agreement): interbank contract to hedge the interest rate risk inmismatched deposit and credits.

The size of the market is enormous.

Euronotes: short term notes underwritten by a group of commercial banks. (3 to 6 monthsmaturity during a facility of 3 to 10 years). Is a way to standardize the market. This kind ofproduct is useful for the big company because on this way is possible to solve anyproblem of treasury management.

Eurocommercial paper: unsecured short-term promissory note issued by a bank or acorporation and placed directly with the investment public through a dealer. Thecommercial paper is not secured that means that bank of company that issued thecommercial paper sells this note directly on the market to get rid of the dealer.

THE MARKET FOR FOREIGN EXCHANGE

Exchange rateIs the price of one currency in terms of another currency.