Title: international accounting and taxation
1 chapter 19
- international accounting and taxation
2Chapter 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
3Chapter Objectives 2
- Describe the accounting procedures used by U.S.
firms engaged in international business - Identify the major international taxation issues
affecting international businesses
4Chapter Objectives 3
- Discuss the taxation of foreign income by the
U.S. government - Assess the techniques available to resolve tax
conflicts among countries
5Accounting 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.
6Figure 19.1 Influences on a Countrys Accounting
System
Cultural Values and Attitudes
Legal System
International Political Ties
Economic System
Accounting Standards and Practices
Sources of Capital
7Differences in Country Accounting Systems
Reported income and profits
Valuations of assets and inventories
Tax reporting
Desire to operate in a given country
Use of accounting reserves
8Other National Accounting Differences
- Capitalization of financial leases
- Preparation of consolidated financial statements
- Capitalization of research and development
expenses - Treatment of goodwill
9Efforts 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
10Accounting Problems in International Business
Activities
- Accounting for transactions denominated in
foreign currencies - Reporting the operating results of foreign
subsidiaries in the firms consolidated financial
statements
11Treatment of Foreign Investments
Cost method
Equity method
Consolidation method
12Methods for Translating Subsidiary Financial
Statements
Current rate method
Temporal method
13Table 19.2 Parents 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
14Table 19.3 Translation of Income Statement of
Japanese Subsidiary of U.S. Firm Using the
Current Rate Method
15Table 19.4 Translation of Balance Sheet of
Japanese Subsidiary of U.S. Firm Using the
Current Rate Method
16Methods 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
17The Bahamas has flourished because of its status
as a tax haven.
18Transfer Pricing
- Intracorporate transfers are common
- Influence on ability to monitor performance
- Influence on taxes paid at home and abroad
19Calculating Transfer Prices
Market- based method
Nonmarket- based method
20Table 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
21Taxation of Foreign Income by the U.S.
Taxation of Exports
Taxation of Foreign Branch Income
Taxation of Foreign Subsidiary Income
22International Tax Conflicts
Tax credits
Bashing
Tax treaties