Sourcing Equity Tax Management

Sourcing equity / Tax management

Contrasting between global tax systems

National taxing has been proven to affect economic decisions made by MNEs. Typically, the settlement of taxation will take two different approaches, which are the worldwide approach and the territorial approach. The first approach will levy taxes based upon the income earned by firms that are controlled in the host country. Therefore, an investor earning income internationally would find his/her income taxed by the local tax authorities. For example, a country such as the United States will tax the income earned based upon firms that are located in the U.S. whether the income is received by firms based in the United States, domestically sourced, and/or foreign sourced (Moffett, Stonehill & Eitemen, 2012). However, an issue that arises is that the taxation does not take into consideration the foreign companies that are based in the United States.

Therefore, the territorial approach will be taken into consideration rather than the worldwide approach. This approach will take the income of firms that are within the legal jurisdiction of the host environment, rather than the country of which the firm is incorporated (Razin & Slemrod, 2010). Although efficient for such a situation, much like the worldwide approach, there are major gaps in coverage if residential firms earn income outside of the country. Only if they are not taxed by the country in which the profits are being earned (Block, 2013). Therefore, both tax approaches are necessary if the full coverage of income will have to take effect.

Foreign income is taxed based on local policies in the overseas nation where income is raised. Therefore, the country of origin of an MNC endeavors to avoid double taxes on the foreign income through exempting income from country of origin taxation or tax credit on taxes paid for foreign income. Most often, countries are illustrated as having a territorial or a worldwide framework with regards to foreign income of the resident corporations. Based on a global approach, nations tax resident companies on all their incomes whether accrued from overseas or domestic activities. From a territorial framework, countries tax resident companies exclusively on income derived from domestic activities (Razin & Slemrod, 2010). In this case, the income derived from overseas subsidiaries is not taxed in the residence jurisdiction of the parent company regardless of being repatriated. Global jurisdiction of taxing provides tax credits for overseas income earners. On the other hand, territorial nations offering an exception from overseas sources of dividends do not provide foreign tax credits on such incomes.

2. Differences in corporate tax structures found across the globe

The major difference between taxable income and economic income in tax structures across the globe are the treatment of depreciation and interest. Other differences exist as well, but the most critical dereferences are the approaches to depreciation and interest. Interest payment as used by a company in financing an investment always determines the eventual economic income generated. On the contrary, in the pursuit to figure taxable corporate income, companies subtract the payable interests as expenditure (Moffett, Stonehill & Eitemen, 2012). For this reason, the corporate level tax imposed on an investment is dependent upon the magnitude at which the investment is financed by debt investors and equity investors (shareholders).

3. An analysis of the characteristics of international debt markets

International debts markets are used by financial institutions, which are the largest borrowers of the nation. It is also used by governments like the United States and corporations for repayment options, maturity options, and currency denominations.