ch 18 FDI

which fdi method waives the companys rights of protection under the us bilateral protection agreement

both branch and subsidiary

Calvo Doctrine (1868)

laced the sovereign ahead of the foreign investor in within thesovereign' territory. -rejected modern traditional preqs

Expropriation

a government's seizure of a domestic or foreign company's assets

Political risk in foreign business activities is generally described as:

a. Risk that profits in foreign country will be affected by the host country's political structure or instability.

Foreign Sovereign Immunities Act (FSIA)

Foreign states are generally immune from the jurisdiction of U.S.Courts, except for 7 exceptions: foreign state waives immunity, foreigngovernment actions constitute a commercial activity, violation ofinternational law, noncommercial torts, inheritance/gifts, maritimeliens, certain counter claims in lawsuits against US citizens

which method buys assets in that country

branch

foreign branch

subjects the company to be directly liable & fully subject itself to income tax in the foreign country

greatest threats of fdi

expropriation & nationalization

fdi

ownership and active control of the production assets of ongoing business concerns by an investor in a foreign country.

buy back

provider (seller) of manufactured equpt. Will received the manufacturedgoods as payment

Commercial Activities Exception:

state does business as aprivate commercial party. A company can be a foreign state owned business if it is a state owned enterprise.

which method buys foreign stock

subsidiary

Nationalization

taking an entire industry to restructure economy

countertrade

a form of trade in which all or part of the payment for goods or services is in the form of other goods or services

U.S. does not tax on foreign-based U.S.subsidiaries on income earned abroad. It onlytaxes income that is repatriated (sent to U.S.)as dividend to the parent

true

State Sponsor ofTerrorism exception to the FSIA

waives FSIA immunity the sovereign govenment, but does not give a private cause of action against the foreign state itself

tax haven

A country with exceptionally low, or even no, income taxes.

reasons for fdi

- take advantage of host country's natural or human resource - improve ties with customers in foreign countries - get closer to suppliers - avoid trade barriers - diversify & enter new markets

privatization

-opp to nationalization Gov't Assets are transferred/sold/givento private entity, run as private entity

types of currency risks

1. fluctuations of foreign currency 2. inconveritibilty risk by govts

fdi methods

1.foreign branch 2. foreign subsidiary 3. joint ventures

FFERRAL PRINCIPLE

A U.S. person/entity will not be taxed immediately on any income earnedby the foreign corporation it owns. Instead, it will be deferred until it is"repatriated" (paid out to the U.S. person/entity) typically in the form of a dividend

transfer pricing

Pricing of goods, services, and intangible property bought and sold by operating units or divisions of a company doing business with an affiliate in another jurisdiction

modern traditional theory

Recognizes right to nationalize foreign-owned property but: (1) must be for a public purpose, (2)nondiscriminatory (not directed against a specific foreign person),(3) and accomplished by prompt, adequate and effective compensation

risk: arrangement with soft currency countries

Soft Currency Countries might nothave enough U.S. Currency to exchange with their foreign currency

OPIC (Overseas Private Investment Corporation)

US gov agency that provides insurance for investors that can insure losses due to expropriation, currency inconvertibility, and war, revolution, and insurrection

act of state doctrine

a U.S. court can refuse to inquire intothe validity of any act of a foreign government -inapplicable if the foreign statehas entered into an investment treaty that effectively waivesthe policy (Act of State Doctrine) as regards U.S. investors

risk: currency swap agreements

agreements with private investor to, in the future, exchangeamounts of specified currencies

Formulary Apportionment

all income earned by a single person is lumped into 1 category income is apportioned between nations that have some claim to the tax income

counterpurchase

as a condition of sale, the seller agrees to buy other goodsproduced in that country

The most often used (or attempted) and difficult of the only exceptions to the Foreign Sovereign Immunities Act is the exception for:

b. "Commercial activity" by the foreign state.

The US encourages American exports and investment abroad by providing political risk insurance at discounted rates against creeping expropriation, nationalization, revolution and other events through its:

b. Overseas Private Investment Corporation (OPIC).

A "soft currency" is one with incontrovertibility risk, which is:

c. A national currency that is not freely exchangeable for currencies of other nations.

American Appliances (AA) makes small kitchen appliances and cutlery. It sells these to buyers around the world via its website. Goods are shipped directly to European consumers. The taxability for the purchase of such goods constitutes e-commerce, and:

c. The European consumer owes a VAT on such a purchase, typically greater than the US sales tax.

A broad assortment of financial contracts may be purchased from financial intermediaries to hedge against currency fluctuation risks. These are called:

currency swaps

An example of countertrade is when a sale of good is made to a foreign government, which requires as a condition of the sale that the seller buys other goods produced in that country, called a:

d. Counterpurchase agreement.

The US's foreign tax credit policy seeks to:

d. Reduce the incidence of double taxation (taxation of same income by two countries) by applying a credit for foreign taxes already paid.

intl swap dealers association

facilitates transactions bc developed a standard form agreement so that all legal terms in these deals are consistent and the intermediary bears no legal risk from gaps in documentation

foreign subsidiary

fully subjects the company to income tax in the foreign country; but does not make the company directly liable