Chapter 18 International Managerial Finance

Euromarket
The international financial
market that provides for
borrowing and lending
currencies outside their
country of origin.
grossed-up income is calculated. Finally, the related taxes paid in the foreign
country are applied as a credit against the additional U.S. tax liability:
Additional MNC income $100,000
U.S. tax liability at 34%
Total foreign taxes paid
to be used as a credit
$ 34,000
($35,000$6,500) 241,500 41,500
U.S. taxes due
0
Net funds available to the parent MNC
$ 58,500
Because the U.S. tax liability is less than the total taxes paid to the foreign
government, no additional U.S. taxes are due on the income from the foreign subsidiary.
In our example, if tax credits had not been allowed, then “double taxation”
by the two authorities, as shown in what follows, would have resulted in a
substantial drop in the overall net funds available to the parent MNC:
Subsidiary income before local taxes $100,000
Foreign income tax at 35%
235,000
Dividend available to be declared
Foreign dividend withholding tax
$ 65,000
at 10%
26,500
MNC’s receipt of dividends $ 58,500
U.S. tax liability at 34%
219,890
Net funds available to the parent MNC $ 38,610
■
The preceding example clearly demonstrates that the existence of bilateral
tax treaties and the subsequent application of tax credits can significantly
enhance the overall net funds available to MNCs from their worldwide earnings.
Consequently, in an increasingly complex and competitive international financial
environment, international taxation is one of the variables that multinational
corporations should fully utilize to their advantage.
The In Practice box on page 798 discusses the ethical issues of gift-giving and
bribery when doing business in foreign countries, which some consider a form of
additional “taxation.”
Financial Markets
CHAPTER 18 International Managerial Finance 797
During the last two decades the Euromarket—which provides for borrowing and
lending currencies outside their country of origin—has grown rapidly. The
Euromarket provides multinational companies with an “external” opportunity to
borrow or lend funds, with the additional feature of less government regulation.
Growth of the Euromarket
The Euromarket has grown large for several reasons. First, beginning in the early
1960s, the Russians wanted to maintain their dollar earnings outside the legal
jurisdiction of the United States, mainly because of the Cold War. Second, the