12.14 The objectives of global money management
There are two main objectives of global money management: the efficiency objective and the tax minimisation objective.
The efficiency objective
This objective involves keeping cash balances (that is, 'working cash') to a minimum and reducing the cost of converting cash from one currency to another. The firm must collect and pay cash in its normal operations and keep something in reserve to meet unforeseen demands for cash. This reserve is invested in financial institutions such as commercial and investment banks where it generates income. Clearly, good budgets and accurate forecasting are essential in assessing a firm's cash requirements. One of the problems faced by MNEs is that foreign affiliates are sometimes reluctant to provide good quality information to the parent company about their true financial position, preferring to invest surplus cash themselves in the local market. We return to this point in the section on 'Techniques for global money management' shortly.
Transaction costs a re commission fees paid to foreign exchange dealers and transfer fees paid to banks for moving cash from one location to another. Keep this definition in mind when we discuss transaction exposure in the section 'Techniques for global money management'. They are not the same thing!
The tax minimisation objective
Tax planning is crucial for any business, since it can have a profound effect on profitability and cash flow. This is especially true for an MNE. Taxation has a strong impact on:
- location in the initial investment decision
- legal form of the new enterprise, such as branch or subsidiary
- method of finance - internal versus external, debt versus equity
- transfer pricing between entities.
The ultimate aim - the tax objective - is the minimisation of tax.
MNEs face the worldwide principle of double taxation: the parent pays tax in the home country and subsidiaries pay tax in host countries. Most countries have tax credits to reduce the taxes paid to the home government by the amount paid to host governments. Some countries have tax treaties which have the same effect as tax credits. A tax treaty is an agreement specifying what items of income will be taxed by the authorities of the country in which the income is earned. The deferral principle specifies that a parent company is not liable for tax until it receives dividends from foreign subsidiaries.
Tax havens are countries which allow MNEs to operate a parent company with low, or even no, income tax, provided the MNE establishes a fully owned subsidiary in the tax haven. The Bahamas and Bermuda are western hemisphere tax havens, and the Cook Islands, north of New Zealand , are a tax haven for Australian and New Zealand companies. Now is a good time to catch up on your textbook's discussion on global money management.
In your text
Hill 2005, Chapter 20, pp. 674-676.
Activity 12.5
From your knowledge of Australia 's tax system, make notes on the tax liabilities of an Australian MNE, such as Pacific Dunlop which has subsidiaries in south east Asia and the US .
If you have little or no knowledge of this topic, you might like to consult with someone (for example, an accountant or bank manager) who might be knowledgeable on tax matters.
Previous Page