Research Paper: Taxation Advice for a Multinational

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[. . .] This will lead not only to growth in the manufacturer's traditional product areas, but also a movement into new, higher-end licensed fashion product lines. Along the way, it is the role of the multinational tax account to guide the company in structuring operations to comply with regulatory environments and optimize tax efficiency across the enterprise (Thruonyi, 2003).

Another critical tax planning issue that must be discussed is the issue of outbound and non-outbound financial transfers. Understanding taxing rights of various countries is only one piece of the jurisdiction puzzle. A multinational account must also understand how the movement of a business transactions is characterized -- a concept that is often thought of in terms of "outbound" vs. "inbound" (Morrison, 2002). In the case of an outbound transaction from the United States, the U.S. will tax only citizens, residents, and domestic corporations on their worldwide income. Income of transparent entities such as partnerships would be taxed to the owners. Alternatively, with an inbound transaction, non-resident aliens or foreign corporations are operating or investing in the U.S. Generally, such entities are not subject to U.S. taxation on their worldwide income. Rather, they are taxed under a territorial concept-based either on U.S. net taxable income or on U.S. gross income. Gross income, representing non-business or investment income in the U.S. is taxed at a rate of 30%, unless such rates are reduced by application of an income tax treaty entered into with the non-resident's home country (Lymer and Hasseldine, 2002).

In dealing with the Swedish multinational H&M, Understanding the basis of a country's taxing rights helps to better understand the types of situations that could lend themselves to double taxation. The following methods can help start-ups alleviate double taxation: a) Some countries do not tax foreign income of their citizens, residents, or corporations; b) Other countries offer a credit for foreign taxes paid on income earned abroad. In addition, some countries offer a deduction for foreign taxes paid rather than a credit and c) bilateral methods applied by specific country by country tax treaties. Treaties generally provide reduced tax rates on certain types of income. To claim the benefit of the treaty, tax returns may nevertheless be required in the U.S. merely to obtain a reduced rate or a zero rate of tax. Establishing a priority for the rights of a country to impose tax on income earned within its country on a territorial basis, leaving merely residual rights to the country that asserts jurisdiction as to nationality (Kuntz and Peroni, 1991).

The idea of foreign tax credits is worth expanding on in the case of H&M. A significant opportunity to avoid double taxation presents itself in the form of effective use of the U.S. foreign tax credit. The accountant must understand the way in which governments limit their taxing rights. Once again, the U.S. asserts its taxing right broadly on the "worldwide income" of its citizens, residents, and corporations. That is, it taxes all income earned by its citizens, foreign nationals living in the U.S., and businesses incorporated here, without regard to where in the world the income was earned. This is in contrast to the territorial system used by many other countries, which taxes only the income earned on their soil (Hong and Smart, 2010).

Having asserted that broad right to tax, the U.S. then proceeds to unilaterally limit or restrict its tax collection in a number of ways. The rules governing these limitations provide an opportunity to reduce or eliminate double taxation and defer payment of U.S. tax indefinitely and thereby reduce the overall effective tax rate on profits. To limit tax abuse and to prevent the erosion of the U.S. tax base, the government also imposes a further set of rules designed to limit the amount of foreign tax credits that are allowed in any one year and to restrict the ways that a business can defer paying tax on foreign income. In other words, the rules and restrictions that apply to the foreign tax credit and deferral provisions are complex and difficult to navigate. As in all foreign tax planning, skill and experience are needed to help navigate the system. The challenge for H&M is to steer clear of the pitfalls created by the "tax avoidance provisions," while taking advantage of all the benefits allowed to avoid double taxation and the deferral of tax on un-repatriated foreign earnings (Kuntz and Peroni, 1991).

In conclusion, tax management planning for a large multinational corporation is no simple matter. The accountant who takes up such a task must have a firm understanding of the currency market, the merits of various accounting methods (such as the separate transactions accounting method vs. The profit and loss method) as well as a firm grasp of both the U.S. And host-nation taxation system. Significant saved profits and improved corporate efficiency can be achieved through an understanding of these important issues.

References:

"Annual Results 2010." Hennes & Mauritz. Retrieved 1 March 2012. URL: http://feed.ne.cision.com/wpyfs/00/00/00/00/00/13/7F/61/wkr0005.pdf

Hong, Q. And Smart, M. 2010. In Praise of Tax Havens: International Tax Planning and Foreign Direct Investment. European Economic Review. 54(1): 82-95.

Johnson, G. And Scholes, K. 2002. Exploring Corporate Strategy (6th ed). Prentice Hall: London, UK.

Kuntz, J.D. And Peroni, R.J. 1991. U.S. International Taxation. Warren, Gorham and Lamont: New York, NY.

Lymer, A. And Hasseldine, J. 2002. The International Taxation System, Kluwer Academic Publishers: New York, NY.

Morrison, J. 2002, The International Business Environment. Palgrave: London, UK.

Thruonyi, V. 2003. Comparative Tax Law. Aspen Publishers: New York, NY. [END OF PREVIEW]

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