Chapter 18
value added tax (VAT)
EU tax on purchases that is much higher than the US sales tax on retail goods
comity
good relations with nations
soft currency
a currency that is not easy to exchange for other currencies
countertrade
a popular form of currency inconvertibility; reciprocal arrangement between the buyer and seller for the sale of goods or services intended to minimize the outflow of foreign exchange from the buyer's country
export credit agencies
agencies in developed nations that promote investment from their own countries
reinsurance treaty
agreement among insurance companies that spreads the risk among its members; the underwriter can commit the resources of the entire group after negotiating the transaction with the US investor
counter purchase agreement
common type of countertrade; involves the sale of goods to a buyer, often a foreign government, which requires as a condition of the sale that the seller buy the other goods produced in that country
tax haven
country where the effective tax rate on a relevant item of income is very low or zero
soft blockages
delays in processing conversion requests by the local authorities
barter
direct exchange of goods for goods or services
foreign branch
division of the home country corporation that is not a separate legal person
creeping expropriation
effect of laws and regulations that subject the investor to discriminatory taxes, legislative controls over management of the firm, price controls, forced employment of nationals, license cancellation, and restrictions on currency convertibility
unitary index adjustment factors
eliminates the problem of disclosing confidential information; parties provide for formulaic adjustment of payment terms based on an accepted unitary index
passive investment
minority investment that involves either a passive debt investment, making a loan to a foreign business, or a passive equity investment, purchasing an equity interest in the foreign business as a portfolio investment that does not allow for control of the business
hard blockages
occur when the foreign government passes a law that prevents the conversion or transfer
profit margin preservation provisions
price or payment to a foreign investor is adjusted periodically to maintain the same profit margin; can disclose the foreign company's cost structure, which is confidential information
insurance syndicates
private pools of money provided by investors to insure specific projects on a case-by-case basis
active investment
results in the investor having ownership interest in the foreign business
import substitution rights
rights available when preferential currency exchange rights are not available; rights available when a new venture will manufacture a product in a soft currency country that the nation had previously imported
currency risk
risk that profits in foreign host country's currency will not translate into equivalent profits in investor's home country
political risk
risk that profits will be affected by changes in the host country's political structure or instability
foreign subsidiary
separate corporate entity organized under the laws of the foreign host country
nationalization
taking of an entire industry or natural resource as part of a plan to restructure the nation's economic system
expropriation
taking of an isolated item of property
trade creditors
the entities that sell supplies or services to a venture
fluctuation risk
the possibility that the currency of the country in which the US investor has put its money will devalue against the US dollar
inconvertibility risk
the risk that the government of a country with soft currency will hinder the foreign entrepreneur from trading the foreign currency back into US dollars
repatriated
when income is paid out to the US person, typically in the form of a dividend
political risk analysis
when the enterprise retains a firm or its own personnel to analyze a host country's risk fo nationalization/ expropriation, as it would study another business problem
privatization
when the national sovereign transfers a government-owned asset to private parties
buy-back agreement
when the provider of the equipment or technology used in manufacturing will receive, as its payment, a portion of the goods manufactured by the suppliers equipment or in the factory in which the equipment is installed
double taxation
when the same item of income is taxed by two different tax authorities
modern-traditional theory
a theory that dominates thinking on expropriation and nationalization in developed countries; permits takings but imposes certain requirements on the nation exercising its power; exercise of this right must be for a public purpose, nondiscriminatory, and accompanied by prompt, adequate, and effective compensation
traditional theory
a theory that dominates thinking on expropriation and nationalization in developed countries; prohibits all takings of foreign property
parallel exchange
formed when foreign investors form a consortia to trade local soft currency; the investors, all committed to the local incontrovertibility risk, spread that risk over a larger group, with the hopes of reducing the vagaries of local bureaucracy
currency exchange rights
if investor proposes bringing a high desired industry to a soft currency nation, it can negotiate with the government in advance for preferential access to hard currency, resulting in this
currency inconvertibility
inability to convert currency
foreign direct investment
investor owns and actively controls productive assets of ongoing business concerns in a foreign country
inconvertibility or nontransfer insurance policy
investors can purchase these policies to insure against hard blockages or soft blockages (For a higher fee); type of political risk insurance
transfer pricing
tax problem when related parties like a parent and subsidiary are free to fix prices to one another because the market forces do not discipline the prices
net book value
tax-related depreciated cost of assets without regard to whether there has in fact been true depreciation in value