CH-19 The Multinational Finance Function – International Business: Environments and Operations : Exam Guide

CHAPTER 19 The Multinational Finance Function 1. The treasury function in a company focuses on _____. a. improving distributorship relationships b. acquiring and allocating financial resources among the company's activities and projects c. accounting issues d. providing financial statements according to international financial reporting standards Answer: b. acquiring and allocating financial resources among the company's activities and projects 2. Acquiring and allocating financial resources among the company's activities and projects is the responsibility of the _____. a. accounting function of the firm b. external auditors c. treasury staff under the chief financial officer d. financial marketing manager Answer: c. treasury staff under the chief financial officer 3. The selection, issuance, and management of long-term debt and equity capital is part of the _____. a. capital budgeting decision b. working capital management activities c. accounting rather than the treasury function d. long-term financing aspect of cash flow management Answer: d. long-term financing aspect of cash flow management 4. The long-term financing dimension of cash management _____. a. deals with the selection, issuance, and management of long-term debt and equity b. is generally not affected by currency changes because everyone borrows in U.S. dollars c. focuses on the analysis of investment opportunities d. is independent of the capital structure of an MNE Answer: a. deals with the selection, issuance, and management of long-term debt and equity 5. The capital structure of a firm is the _____. a. selection, issuance, and management of long-term debt b. determination of the proper mix of debt and equity c. analysis of investment opportunities d. same in every country where an MNE operates Answer: b. determination of the proper mix of debt and equity 6. The degree to which a firm funds the growth of a business by debt is known as _____. a. leveraging b. equity financing c. hedging d. after-tax cost of debt Answer: a. leveraging 7. Offshore financial centers are _____. a. found only in high-income countries due to political stability b. allowed to deal in local currencies but not Eurocurrencies c. often hindered by an aggressive local regulatory climate d. cities or countries that provide large amounts of currencies other than their own Answer: d. cities or countries that provide large amounts of currencies other than their own 8. A major problem with MNEs using offshore financial centers is that _____. a. all of their activities are illegal b. they may give unfair tax advantages to companies, which is a concern to the OECD c. they allow companies to avoid taxes, but it is very difficult to move money from one country to another d. in order for the center to function properly, the MNEs must be locally owned and operated in the center Answer: b. they may give unfair tax advantages to companies, which is a concern to the OECD 9. The process whereby MNEs determine which projects and countries will receive capital investment funds is _____. a. leveraging b. debt financing alternatives c. capital budgeting d. operational auditing Answer: c. capital budgeting 10. Capital budgeting is _____. a. the process that determines which projects and countries will receive capital investment funds b. determining the proper mix of debt and equity c. the proper management of the company's current assets and liabilities d. more simplified in foreign operations because they are typically smaller Answer: a. the process that determines which projects and countries will receive capital investment funds 11. Which of the following is unique to foreign project assessment in the capital budgeting decision? a. the need to determine project cash flows b. Parent cash flows and project cash flows are the same. c. Local tax issues affect the determination of free cash flows and the remittance of earnings d. Inflation is not an issue, because companies use the same inflation rate in both the domestic and international setting in order to make the analysis more comparative. Answer: c. Local tax issues affect the determination of free cash flows and the remittance of earnings 12. One way to account for the challenge of the variability of future cash flows is to _____. a. adjust the hurdle rate for the project b. use the most likely cash flow estimate c. ignore different rates of inflation so that you don't confuse the comparison of different alternatives d. leave out a consideration of the terminal value of an investment Answer: a. adjust the hurdle rate for the project 13. In making cash transfers to a centralized cash pool, _____. a. loans are not a good way to transfer funds due to interest payments b. dividends are repayments of loans c. all developing country governments encourage companies to transfer funds out of the country in order to help their balance of payments d. governments sometimes restrict the flow of dividends Answer: d. governments sometimes restrict the flow of dividends 14. An essential part of global cash management is _____. a. developing good cash budgets and forecasts b. leaving cash in subsidiaries because they know best how to use the funds c. convincing governments to revalue their currencies so that dividends are worth more when they are sent to the home office d. using equity instead of debt to fund local operations so that the subsidiary doesn't have to make interest payments Answer: a. developing good cash budgets and forecasts 15. The process of coordinating cash inflows and outflows among subsidiaries so that only the balance in cash is transferred is known as _____. a. dividend remissions b. transfer pricing c. multilateral netting d. currency hedging Answer: c. multilateral netting 16. When engaging in multilateral netting, _____. a. it is not necessary to worry about exchange rates because companies deal only in the parent currency b. treasury identifies the total receivables, payables, and net position for each subsidiary so that they can net the flows instead of having each subsidiary settle accounts individually c. it is important to realize that these types of activities are illegal and subject to the Foreign Corrupt Practices Act d. treasury eliminates the transfer of funds by netting receivables and payables, and then forgiving the difference Answer: b. treasury identifies the total receivables, payables, and net position for each subsidiary so that they can net the flows instead of having each subsidiary settle accounts individually 17. A letter of credit _____. a. cannot be amended b. obligates the importer's bank to honor a draft presented to it c. is issued by a credit agency to a bank d. is more secure than cash in advance Answer: b. obligates the importer's bank to honor a draft presented to it 18. An irrevocable letter of credit _____. a. is issued by an irrevocable credit agency b. is the basis for multilateral netting c. can be amended only if all parties involved agree d. obligates the exporter's bank to pay interest to the importer Answer: c. can be amended only if all parties involved agree 19. A letter of credit that obligates the exporter's bank to honor a draft presented to it is known as _____. a. a confirmed letter of credit b. a time draft letter of credit c. an amendable letter of credit d. a cash in advance letter of credit Answer: a. a confirmed letter of credit 20. An open account is when _____. a. a bank is obligated to make payment, even when the importer defaults b. the exporter bills the importer but does not require formal payment documents c. a company sells to government entities d. the bank requires a letter of credit to open an account with the exporter Answer: b. the exporter bills the importer but does not require formal payment documents 21. A foreign exchange exposure that arises because of a change in the value of exposed assets or liabilities of foreign currency financial statements is _____. a. translation exposure b. transaction exposure c. economic exposure d. hedge exposure Answer: a. translation exposure 22. A translation exposure _____. a. occurs when reporting systems are inadequate b. generally takes place when foreign currencies weaken against the dollar c. is where the value of an exposed asset changes as the exchange-rate changes d. results in a gain or loss in cash flows Answer: c. is where the value of an exposed asset changes as the exchange-rate changes 23. The combined effect of an exchange-rate change on the financial statements of a foreign subsidiary _____. a. generally results in a foreign exchange gain b. generally results in a foreign exchange loss c. is neither a gain nor a loss because of accounting rules d. is either a net gain or a net loss Answer: d. is either a net gain or a net loss 24. If a U.S. company has operations in Japan during a period when the yen is rising against the dollar, _____. a. translated earnings would be higher than before the strengthening of the exchange rate b. translated earnings would be lower than before the strengthening of the exchange rate c. there would be no gain or loss on translating the financial statements into dollars d. the gains or losses would not affect earnings per share and stock prices Answer: a. translated earnings would be higher than before the strengthening of the exchange rate 25. An exposure that arises because of a foreign currency receivable or payable that results from exports or imports is _____. a. a translation exposure b. a transaction exposure c. an economic exposure d. a hedge exposure Answer: b. a transaction exposure 26. A transaction exposure _____. a. occurs when reporting systems are inadequate b. generally takes place when foreign currencies weaken against the dollar c. is where the dollar value or a receivable or payable from exports or imports changes as the exchange-rate changes d. does not result in a gain or loss in cash flows Answer: c. is where the dollar value or a receivable or payable from exports or imports changes as the exchange-rate changes 27. Assume that a U.S. company exports to Canada and that the sale is denominated in Canadian dollars. a. The U.S. company would report a gain if the U.S. dollar rises against the Canadian dollar. b. The Canadian company would report a gain if the Canadian dollar falls against the U.S. dollar. c. The U.S. company would report a loss if the Canadian dollar falls against the U.S. dollar d. Exports do not result in a gain or loss. Answer: c. The U.S. company would report a loss if the Canadian dollar falls against the U.S. dollar 28. Assume that a British company exports to a German company and that the export is denominated in euros. a. The German company would result in a loss if the euro strengthens against the dollar. b. The British company would result in a gain if the euro strengthens against the dollar c. The British company would not result in a gain or a loss because the sale is denominated in euros, not pounds. d. Exports result in translation exposures but not transaction exposures. Answer: b. The British company would result in a gain if the euro strengthens against the dollar 29. An exposure that arises from effects of exchange rate changes on the competitive position of a company is called a(n) _____. a. translation exposure b. transaction exposure c. economic exposure d. hedge exposure Answer: c. economic exposure 30. An economic exposure _____. a. occurs when reporting systems are inadequate b. generally takes place when foreign currencies weaken against the dollar c. is where the sourcing of parts and components changes as exchange rates change d. is the same as a translation exposure Answer: c. is where the sourcing of parts and components changes as exchange rates change 31. Assume that a Japanese auto manufacturer was making cars in Japan and exporting them to the United States and that the yen was rising against the dollar. An effective economic strategy might be to _____. a. continue to export cars to the United States and raise prices in order to pick up more market share b. increase manufacturing capacity in Japan to service the growing U.S. market c. stop selling in the U.S. market because the U.S. dollar is losing value against the Japanese yen d. start assembling in the United States to better match dollar costs with dollar revenues Answer: d. start assembling in the United States to better match dollar costs with dollar revenues 32. Assume a U.S. exporter sells to a British importer and denominates the sale in dollars. If the dollar rises over time against the British pound, what types of economic exposure and/or possible strategies could the exporter or importer face? a. The U.S. exporter has no economic risk because the sale is denominated in dollars. b. The British importer has only economic risk if the dollar falls against the pound. c. The U.S. exporter could lower prices in order to reduce the cost to the importer and allow them to keep up sales volume d. The U.S. exporter does not face an economic exposure, but the British importer does because it must pay in dollars. Answer: c. The U.S. exporter could lower prices in order to reduce the cost to the importer and allow them to keep up sales volume 33. The first step in establishing a strategy to protect a company from foreign exchange risks is _____. a. formulating a hedging strategy b. adopting an overall policy on exposure management c. defining and measuring exposure d. establishing a reporting system Answer: c. defining and measuring exposure 34. Defining and measuring exposure involves _____. a. setting up a good reporting system b. taking into account translation, transaction, and economic exposure c. adopting operational but not contractual hedges d. deciding who will be responsible for exchange-rate changes Answer: b. taking into account translation, transaction, and economic exposure 35. In order to establish a good reporting system, _____. a. top management needs to include participation from foreign operations b. companies typically do not worry much about economic exposure c. companies combine translation and transaction exposure in order to simplify lines of reporting d. it is not a good idea to centralize exposure due to the differences in exchange rates worldwide Answer: a. top management needs to include participation from foreign operations 36. Defining and measuring exposure _____. a. is the first step in designing a good exposure management strategy b. is effective for transaction exposure but not for translation exposure c. is effective for translation exposure but not for economic exposure d. should use both central control and input from foreign operations Answer: d. should use both central control and input from foreign operations 37. A hedging instrument that allows one to establish a fixed exchange rate for future transactions where delivery is required is a(n) _____. a. option b. investment contract c. future spot contract d. forward contract Answer: d. forward contract 38. Assume that you work for treasury at the parent company and that you have a foreign subsidiary in a country where the exchange rate is expected to weaken against your currency. Which strategy would you use to transfer funds? a. a lead strategy if you anticipate transferring money from the foreign subsidiary to the parent company b. a lead strategy if you anticipate sending money from the parent to the subsidiary c. a lag strategy if you anticipate transferring money from the foreign subsidiary to the parent company d. incur more debt Answer: a. a lead strategy if you anticipate transferring money from the foreign subsidiary to the parent company 39. An example of an operational hedging strategy against foreign exchange risk is _____. a. using a forward contract to establish a fixed exchange rate for future transactions b. using local debt to balance local assets c. using a foreign currency option to ensure access to foreign currency at a fixed exchange rate for a specific period of time d. not using leads and lags for intercompany payments Answer: b. using local debt to balance local assets 40. Assume that a Canadian exporter sells to a French importer and denominates the sale in euros, which opens the exporter up to foreign exchange risk. Also, assume that the exporter goes to its investment bank and enters into a contract with the bank to gain the right but not the obligation to deliver euros for Canadian dollars at an agreed-upon exchange rate. This is an example of a _____. a. lead strategy b. lag strategy c. foreign currency option d. forward contract Answer: c. foreign currency option 41. Foreign branch income is _____. a. deferred from U.S. taxation until a dividend is remitted to the parent company b. considered passive income and therefore not subject to U.S. taxation c. directly included in the parent's taxable income in the year in which it is earned d. considered active income and therefore deferred until future years Answer: c. directly included in the parent's taxable income in the year in which it is earned 42. Assume that a foreign subsidiary earns income but does not need to include that income with the parent company's income for tax purposes yet. This would be an example of _____. a. tax deferral b. the tax credit c. passive income recognition d. branch deferral Answer: a. tax deferral 43. Foreign source income that is derived from the active conduct of a trade or business and therefore subject to U.S. taxation is known as _____. a. passive income b. active income c. uncontrollable foreign corporation income d. tax haven income Answer: b. active income 44. Subpart F income is _____. a. usually earned by a branch rather than a corporation b. not taxed to the parent unless a dividend is remitted c. not eligible for the tax credit d. passive and usually derived from operations in a tax-haven country Answer: d. passive and usually derived from operations in a tax-haven country 45. A price on goods and services sold by one member of a corporate family to another is known as a(n) _____. a. transfer price b. tax credit price c. passive price d. active price Answer: a. transfer price 46. If a foreign subsidiary is located in a low tax country, the parent company would probably use a _____. a. high transfer price on inventory shipped from the parent to the subsidiary b. high transfer price on goods sold by the subsidiary to the parent c. low transfer price on inventory shipped from the subsidiary to the parent d. tax credit price to minimize local tax liabilities Answer: b. high transfer price on goods sold by the subsidiary to the parent 47. The OECD is concerned about transfer pricing practices, because _____. a. transfer pricing can help maximize a company's worldwide tax liability b. transfer prices tend to be higher in industrial than developing countries c. governments use transfer prices to manipulate companies' investment strategies d. companies use transfer prices to manipulate prices and therefore taxes Answer: d. companies use transfer prices to manipulate prices and therefore taxes 48. A transfer price is _____. a. usually high on goods shipped from the parent to the subsidiary if the subsidiary is in a low tax country b. usually low on goods shipped from the parent to the subsidiary if the subsidiary is in a country where there are restrictions on the flow of foreign exchange c. a price on goods and services sold by one member of a corporate family to another d. a price on goods sold from a parent to a subsidiary but not from a subsidiary to a parent Answer: c. a price on goods and services sold by one member of a corporate family to another 49. The principle by which the tax authorities allow firms to reduce their tax liability by the amount of income taxes paid to foreign governments is known as _____. a. transfer pricing b. the tax credit c. lag strategies in tax planning d. passive income reductions Answer: b. the tax credit 50. According to the tax credit, _____. a. income can be excluded from U.S. taxation b. passive income can be sheltered from U.S. taxation but not active income c. firms can reduce their tax liability by the amount of income taxes paid to foreign governments d. companies are allowed to defer the recognition of income until the foreign subsidiary has declared a dividend Answer: c. firms can reduce their tax liability by the amount of income taxes paid to foreign governments 51. A tax credit is _____. a. a dollar-for-dollar reduction of tax liability and must coincide with the recognition of income b. a credit on goods and services sold by one member of a corporate family to another c. useful only when foreign taxes are higher than parent country taxes d. useful only with foreign taxes are lower than parent country taxes Answer: a. a dollar-for-dollar reduction of tax liability and must coincide with the recognition of income 52. Assume that U.S. MNE A earns $100,000 of foreign source income, that the tax rate in the foreign country is 40 percent, and that the tax rate in the United States is 35 percent. How much total (both domestic and foreign) tax would the company pay on that foreign source income, assuming that the tax credit principle applies? a. $40,000 b. $35,000 c. $75,000 d. $5,000 Answer: a. $40,000 53. A tax regime where each entity is taxed when it earns income is known as the _____. a. integrated entity approach b. separate entity approach c. tax credit approach d. double taxation approach Answer: b. separate entity approach 54. A major challenge with non-U.S. tax practices is that _____. a. other countries use the separate entity approach, whereas the United States uses the integrated approach b. tax laws are often loosely enforced around the world c. foreign tax rates are always lower than U.S. tax rates d. the United States is the only country in the world that raises money using the value-added tax Answer: b. tax laws are often loosely enforced around the world 55. With the value-added tax, _____. a. each entity is taxed when it earns income b. dividends are taxed at the same rate that is applied to the value added by the firm c. each company is taxed on the value added to the product d. tax rates are standardized worldwide through the OECD so that no company has an unfair advantage on the taxes it charges Answer: c. each company is taxed on the value added to the product 56. The primary purpose of _____ is to prevent international double taxation or to provide remedies when it occurs. a. transfer price agreements b. tax treaties c. tax credits d. separate entity taxation Answer: b. tax treaties 57. The CFO's job is no more complex in the global environment than it is in the domestic environment. Answer: False 58. The treasurer of an MNE reports to the vice president of finance and is responsible for activities such as exposure management and processing foreign currency. Answer: True 59. The amount of leverage used is the same from country to country because of the demands of the capital markets. Answer: False 60. The weighted average cost of capital is affected by many factors, including local tax rates. Answer: True 61. The net present value of a project is the number of years required to recover the initial investment made. Answer: False 62. Capital budgeting requires companies to determine free cash flows, which are affected by factors such as local tax rates. Answer: True 63. In multilateral netting, corporate treasury requires subsidiaries to settle their accounts individually with each other, but then net the balances with corporate treasury. Answer: False 64. The process of coordinating cash inflows and outflows among subsidiaries so that only net cash is transferred is known as multilateral netting. Answer: True 65. The most secure way to receive money in an export transaction is through an open account. Answer: False 66. A documentary draft is an instrument instructing the importer to pay the exporter if certain documents are presented. Answer: True 67. A translation exposure arises because the dollar value of the exposed asset changes as the exchange rate changes. Answer: True 68. A translation exposure results in an actual cash flow gain or loss. Answer: False 69. A transaction exposure results in a foreign exchange gain or loss. Answer: True 70. Assume that a U.S. company exports to a Brazilian company and denominates the sale in U.S. dollars. If the dollar rises against the Brazilian real, the U.S. company will recognize a dollar loss. Answer: False 71. An economic exposure does not result in a change in future cash flows. Answer: False 72. An exposure where exchange-rate changes impact the location of investments is known as an economic exposure. Answer: True 73. In terms of foreign exchange risk management, companies usually pick one strategy, such as using forward contracts, instead of using multiple strategies, such as operational and contractual hedges. Answer: False 74. Assume that a company has a foreign subsidiary in a country with an exchange rate that is expected to strengthen against the parent company's currency. If the parent is planning the timing for the subsidiary to send a dividend to the parent, it would probably choose a lag strategy. Answer: True 75. International taxation is generally easier than domestic taxation. Answer: False 76. Taxation is an important cash flow issue, but it typically does not have a strong impact on the choice of organizational form (such as branch or subsidiary) or the location of an investment. Answer: False 77. Companies establish arbitrary transfer prices primarily because of differences in taxation between countries. Answer: True 78. The OECD has set transfer pricing guidelines to enhance the manipulation of prices and therefore taxes for MNEs and the countries where they operate. Answer: False 79. A tax credit is a credit on goods and services paid by one member of a corporate family to another. Answer: False 80. If the tax rate in a foreign country is less than the tax rate in the parent country, the tax credit would allow the parent company to use all of the foreign income tax paid as a tax credit to offset the parent company tax liability. Answer: True 81. In the case of exports, the EU rebates value-added taxes so that they do not appear in the final price to the consumer. Answer: True 82. Problems with different countries' tax practices arise from lack of familiarity with laws and loose enforcement. Answer: True 83. In a short essay, discuss the responsibilities of the chief financial officer. Answer: One of the most important people on the management team, crucial to a company's success, is the vice president of finance, also known as the chief financial officer (CFO). The finance function in the firm focuses on cash flows. The management activities related to cash flow can be divided into four major areas: a. Capital structure—Determining the proper mix of debt and equity b. Capital budgeting—Analyzing investment opportunities c. Long-term financing—Selection, issuance, and management of long-term debt and equity capital, including location and currency d. Working capital management—Proper management of the company's currency assets and liabilities The CFO acquires financial resources and allocates them among the company's activities and projects. Acquiring resources means generating funds either internally or from sources external to the company at the lowest possible cost. The CFO's job is more complex in a global environment than in the domestic setting because of forces such as foreign exchange risk, currency flows and restrictions, different tax rates and laws pertaining to the determination of taxable income, and regulations on access to capital in different markets. 84. What are offshore financial centers, and why are they used? Answer: Offshore financial centers are cities or countries that engage in a variety of financial transactions and that provide significant tax advantages to companies and individuals who do business there. These centers provide an alternative, usually cheaper, source of funding for MNEs so that they don't have to rely strictly on their own national markets. Offshore financial centers have one or more of the following characteristics: a. A large foreign-currency market for deposits and loans b. A market that is a large net supplier of funds to the world financial markets c. A market that is an intermediary or pass-through for international loan funds d. Economic and political stability e. An efficient and experienced financial community f. Good communications and supportive services g. An official regulatory climate favorable to the financial industry, in the sense that it protects investors without unduly restricting financial institutions 85. In a short essay, discuss multilateral netting. Answer: An important cash-management strategy is netting cash flows internationally. Netting means a company establishes one center to handle all internal cash/funds/financial transactions. The advantages of establishing their clearing accounts and mechanisms for transferring funds across national boundaries include: a. Optimizing the use of excess cash b. Reducing interest expenses and maximizing interest yields c. Reducing costly foreign exchange, swap transactions, and intercompany transfers d. Minimizing administrative paperwork e. Centralizing and speeding information for tighter control and improved decision-making 86. What is foreign currency translation exposure, and how can it affect an MNE? Answer: Foreign currency financial statements are translated into the reporting currency of the parent company so that they can be combined with financial statements of other companies in the corporate group to form the consolidated financial statements. Exposed accounts either gain or lose value in dollars when the exchange rate changes. The combined effect of the exchange rate change on all assets and liabilities is either a net gain or loss. However, the gain or loss does not represent an actual cash-flow effect because the cash is only translated into dollars, not converted into dollars. The problem is that reported earnings can either rise or fall against the dollar because of the translation effect, and this can affect earnings per share and stock prices. 87. What is economic exposure? How does it arise? Answer: Economic exposure, also known as operating exposure, is the potential for change in expected cash flows. Economic exposure arises from the pricing of products, the sourcing and cost of inputs, and the location of investments. 88. What are the key elements of an exposure management strategy? Answer: To protect assets adequately against risks from translation, transaction, and economic exposure of exchange rate fluctuations, management must: a. Define and measure exposure b. Organize and implement a reporting system that monitors exposure and exchange-rate movements c. Adopt a policy assigning responsibility for minimizing exposure d. Formulate strategies for hedging exposure 89. In what ways does taxation affect companies' international operating decisions? Answer: Tax planning is crucial for any business because taxes can profoundly affect profitability and cash flow. This is especially true in international business. The international tax specialist must be familiar with both the home country's tax policy on foreign operations and the tax laws of each country in which the international company operates. Taxation has a strong impact on several choices: a. Location of the initial investment b. Choice of operating form, such as export/import, licensing agreement, overseas investment c. Legal form of the new enterprise, such as branch or subsidiary d. Method of financing, such as internal or external sourcing and debt or equity e. Method of setting transfer prices 90. What is a transfer price, and why is it used? Answer: A major tax challenge, as well as impediment to performance evaluation, is the extensive use of transfer pricing in international operations. A transfer price is a price on goods and services sold by one member of a corporate family to another, such as a parent to its subsidiary in a foreign country. Because the price is between related entities, it is not necessarily an arm's-length price, that is, a price between two companies that do not have an ownership interest in each other. Companies establish arbitrary transfer prices primarily due to differences in taxation between countries. Companies also may set arbitrary transfer prices for competitive reasons or because of restrictions on currency flows. 91. In a short essay, discuss value-added tax. Answer: A value-added tax (VAT) is computed by applying a VAT tax rate on total sales. However, any company that purchased materials or other inputs into its manufacturing process from companies that might have already paid a VAT on their sales, needs to pay the tax only on the difference between its sales and inputs that have already been taxed. As the name implies, VAT means that each independent company is taxed only on the value it adds at each stage in the production process. For a company that is fully vertically integrated, the tax rate applies to its net sales because it owns everything from raw materials to finished product. The VAT does not apply to exports, as the tax is rebated to the exporter and is not included in the final price to the consumer. This practice results in an effective stimulus for exports. In addition, it is considered by U.S. tax officials and MNEs to be a subsidy to European exports, because the export price can be lower than the domestic price of goods by the amount of the VAT. 92. In a short essay, discuss the elimination of double taxation using tax treaties. Answer: The primary purpose of tax treaties is to prevent international double taxation or to provide remedies when it occurs. The United States has active tax treaties with more than 48 countries. The general pattern between two treaty countries is to grant reciprocal reductions on dividend withholding and to exempt royalties and sometimes interest payments from any withholding tax. The United States has a withholding tax of 30 percent for owners (individuals and corporations) of U.S. securities that are issued in countries with which it has no tax treaty. However, interest on portfolio obligations and on bank deposits is normally exempted from withholding. When a tax treaty is in effect, the U.S. rate on dividends generally is reduced to 15 percent and the tax on interest and royalties is either eliminated or reduced to a very low level. Test Bank for International Business: Environments and Operations John D. Daniels, Lee H. Radebaugh, Daniel P. Sullivan 9780131869424, 9780201846188, 9780130308016, 9780201566260, 9780201107135, 9780132668668