Syllabus A. Role Of The Senior Financial Adviser A4. Management of international trade and finance

A4e. Multinational financial planning issues 6 / 11

Syllabus A4e)

Discuss the role of the international financial markets with respect to the management of global debt, the financial development of the emerging economies and the maintenance of global financial stability.

Multinationals need to consider three main issues

These are:

  1. Minimisation of global taxes

    Parent company financing of its overseas subsidiaries in the form of debt brings the benefits of:

    (a) reducing the corporation tax bill overseas
    (b) avoiding withholding taxes on dividend payments

  2. Financial market distortions

    Local governments may directly or indirectly offer subsidised finance:

    - Low cost loans may be offered to encourage multinational investment

    - Other incentives may include exchange control guarantees, grants, tax holidays etc

    - Local governments may reduce the interest rates to stimulate the local economy

  3. Managing risk

    Overseas debt finance is a useful means of managing risk:

Risk types Impact of overseas debt finance
Political Reduces exposure to overseas tax increases
If assets are seized, allows the firm to default on the loan (if raised from the host government) or to use international development agencies (with influence over the local government)
Economic The risk of a local devaluation offset by the benefit of lower repayments on a loan

Obtaining a listing on one or more exchanges

Where overseas equity is preferred a listing on an overseas exchange may be considered; this can have a number of advantages.

It will be important to conform to local regulations. Taking when the London Stock Exchange is used as an overseas exchange, the relevant regulations are:

  1. At least three years of audited published accounts

  2. At least 25% of the company’s shares must be in public hands when trading begins

  3. Minimum market capitalisation of £700,000

  4. A prospectus must be published containing a forecast of expected performance

  5. In addition the company will have to be introduced by a sponsoring firm and to comply with the local corporate governance requirements.