1. Please explain both foreign income and repatriation of earnings using three examples that any employee can understand.
a) Include terms like distributed earnings, license fees, and interest and explain where they are used.
2. Next, advise on how the firm can use transfer costs to lower the corporate tax burden, which is 34% in the U.S. and 30% in the foreign location.
a) Include an explanation of foreign income and repatriated earnings composition.
b) Discuss whether or not all the methods named are ethical, and why or why not.
3. Please cite all references.
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Repatriation of earnings is different from what is often termed foreign income. The US Department of Commerce defines foreign income as the total of distributed earnings (dividends paid to the US based firm), reinvested earnings (retained earnings of the foreign affiliate of the US based firm), and net interest income from the foreign affiliate.
The use of the terms parent and affiliate is a little confusing given the data collected by the US Department of Commerce. The cash flow reported to the Department of Commerce are for foreign firms in which a US based firm holds 10% or greater voting equity interest (This is the same definition that the UNCTAD uses for Foreign Direct Investment, and any equity holding below 10% is said to be portfolio investment). The US firm therefore may not be a true parent (holding controlling or exclusive interest), but simply a major equity holder.
Both distributed earning and net interest are net of withholding taxes by the host-country government.
Repatriated earnings on the other hand occur in four major forms:
1. Distributed earnings or Dividends: Dividends, or distributed earnings, are profits from foreign affiliate operations arising from either current period or prior period earnings, including capital gains/losses, which are paid to the owner of the affiliate (either foreign or domestic). Unless otherwise noted this refers to the net payment resulting from the series of cash flows between affiliate and parent. It is not unusual for payments to be made both to the parent from the affiliate, and to the affiliate from the parent - interest payments, for example.
To take an example consider GM China. Suppose they earn a profit after tax of $100 million and decides to distribute $50 million as dividends to the owners. Assume that parent GM has 50% stake in GM China. Then GM earns 50% of $50 million, or $25 million, as dividends from GM China. This is repatriated distributed earnings.
2. Royalties and License Fees: Fees paid for the use, sale, or purchase of intangible property, such as technological techniques, patents, brand names, and so forth.
Most fast food chains just sell intangible property to independent contractors. So when McDonalds ...
This posting advises how firm can use transfer costs.