Chapter 18 Vocab and Cases

countertrade

a reciprocal agreement between buyer and seller for the sale of goods or services intended to minimize the outflow of foreign exchange from the buyers country

Double taxation

where the same item of income is taxed by two different tax authorities

active investment

will result in the investor having an ownership interest in the foreign business as either a foreign branch or subsidiary

OBB Personenverkehr AG v. Sachs

- Carol Sachs as a resident of California who in March 2007, purchased an Eurail pass over the internet from The Rail Pass Experts, a Massachusetts-based travel agent. - April 2007, Sachs arrived at the Innsbruck train station, planning to use her Eurail pass to ride an OBB train. As she attempted to board the train, Sachs fell from the platform onto the tracks and her legs were crushed. - Sachs sued OBB in the US District Court. OBB claimed sovereign immunity and moved to dismiss the suit for lack of subject matter jurisdiction - decision: the judgement of the Court of Appeals for the Ninth Circuit was reversed.

INA Corp Vs. Islamic Republic of Iran

- On May 3, 1978, a subsidiary of INA corp INA international insurance company acquired 20% of the shares of Bimek Shargh, an iranian insurance company - the proposed investment by INA intl was approved by central insurance of iran, the govt body responsible for the regulation of insurance activities in iran, by a letter to Shargh management dated 1977. - INA intl paid 20 mil rials for the share of shargh - INA sued for what it alleged to be the going value of its shargh shares, together with interest and legal costs - Decision: iran-US claims tribunal awarded INA corp the amount it sought plus simple interest at 8.5% per annum from the date of nationalization

Compaq Computer Corp. Subsidiaries v. Commissioner of Internal Revenue

- Petitioner compaq computer corp manufactures personal computers. Compaq set up a PCA subsidiary in Singapore. The petitioner purchased PCA's from its subsidiary at actual market prices. - The IRS took the position that such pricing resulted in too much profit being left in low tax Singapore. - Decision: The Tax Court found that petitioner satisfied its burden of proving that the prices in the intercompany transactions were consistent with arm's length prices and ordered the IRS to reduce its deficiency notices.

Bank of America Nat'l Trust & Savings Assn. v. United States

- Plaintiff BoFA conducted a general banking business in the kingdom of Thailand, the republic of the Philippines and the republic of Argentina. - BoFA payed the 3 jurisdictions various types of taxes and demanded a credit for these assessments. - the IRS disallowed a number of the credits claimed and bofa appealed - Decision: the US court of claims dismissed the petition for a tax credit.

National Thermal Power corp vs. the singer co.

- The national thermal power crop of India entered into a contract with the singer co, a British concern, to supply equipment and erect certain projects in India - a dispute arose, and singer sought arbitration under international chamber of commerce rules in London, as provided in the contract - singer won the arbitration and was granted an award by the ICC tribunal. singer then sought to enforce the award in India under the Indian foreign awards act, which limits the role of Indian courts to recognition and enforcement of the foreign arbitral award. - Decision: the SC of India set aside the judgement of the Delhi high court and ordered a retrial of the entire case in India, effectively finding that if Indian law governs a contract, an international arbitration provision is void

ADC Affiliate et al. v. The Republic of Hungary

- claimants were formed entities that had invested in the 1999 expansion of an airport near Budapest, Hungary. The airport was owned by the government of Hungary - 2002 government enacted a decree that resulted in the privatization of the airport and caused the effective termination of the claimant's long-term leases. Arbitration against Hungary and sued. - The ICSID panel ruled that this was a violation of the agreement with the investors, which took the investors property, and unlawful expropriation.

W.S. Kirkpatrick v. Environmental Tectronics Corp.

- the government of Nigeria awarded a military contract. The losing bidder ETC investigated the circumstances under which the contract had been awarded and the winner had bribed key govt officials who were responsible for making the award. - ETC findings were confirmed and kirkpatrick officials pleaded guilty. - Decision: the US SC affirmed the decision of the court of appeals, permitting ETC to proceed with its lawsuit against Kirkpatrick

political risk analysis

Another form of proactive management. The enterprise retains a firm or its own personnel to analyze a host country's risk of nationalization/expropriation, as it would study any other business problem.

currency exchange rights

When a company negotiates with a foreign government in advance for preferential access to hard currency

Joint Venture

a foreign investor may enter into a joint venture by creating a new entity together with a host country national or by acquiring a portion of an existing local entity

currency swaps

a broad assortment of financial contracts, may be purchased from financial intermediaries to hedge against fluctuation risk

Tax haven

a country where the effective tax rate is very low or zero

inconvertibility or nontransfer insurance policy

a final alternative for the US investor

reinsurance treaty

agreement among insurance companies that spreads the risk among its members

passive investment

can involve 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

Currency inconvertibility

dealing with the inability to convert currency

soft blockages

delays in processing conversion requests by the local authorities

Barter

direct exchange of goods for goods

Comity

good relations

currency risk

if the investment is in an enterprise that will be earning foreign currency; two forms fluctuation and inconvertibility

parallel exchange

in this arrangement, the investors, all committed to the local incontrovertibility risk, spread that risk over a larger group, with the hoping of reducing the vagaries of local bureaucracy

Counterpurchase agreement

involves sale of goods or services with the condition that the seller buy other goods produced in that country

hard blockages

occurs when the foreign government passes a law that prevents conversion or transfer

soft currency

one that is not freely exchangeable for currencies of other nations

Repatriated

paid out to the U.S. person, typically in the form of a dividend

modern-traditional theory

permits takings but imposes certain requirements on the nation exercising its takings power

insurance syndicates

pools of money provided by investors to insure specific projects

fluctuation risk

possibility that the currency of the country in which the US investor has put its money will devalue against the US dollar

nationalization

the taking of an entire industry or a natural resource as part of a plan to restructure the nation's economic system

profit margin preservation provisions

price or payment to the foreign investor will be adjusted periodically to maintain the same profit margin

traditional theory

prohibits all takings of foreign property

export credit agencies

promote investment from their own countries

net book value

reflects the tax-related depreciated cost of assets without regard to whether there has in fact been true depreciation in value

expropriation

taking of an isolated item of property

Creeping Expropriation

the 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

trade creditors

the entities that sell supplies or services to the venture

foreign direct investment (FDI)

the investor owns and actively controls the productive assets of ongoing business concerns in a foreign country.

privatization

the national sovereign transfers a government-owned asset to private parties

buy-back agreement

the provider of the equipment of technology used in manufacturing will receive, as its payment, a portion of the goods manufactured by the supplier's equipment or the factory in which the equipment is installed.

political risk

the risk that profits will be affected by changes in the host country's political structure or instability

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

import substitution rights

these rights are available when the new venture will manufacture a product in the soft-currency country that the nation had previously imported