International Financial Management

Question: Discuss about theInternational Financial Management. Answer: Discussing Arbitrage The process of concurrent purchasing and selling of an asset from different types of market and locations in order to take the benefit of price fluctuations is known as arbitrage (The Economics Times, 2016). As per my point of view in arbitrage, the difference in the price of an asset is considered to be the net amount payable from the business. I believe that getting benefits from the usage of the different transaction for tax purposes is known as tax arbitrage. My understandings reveal that the company makes use of different places for purchasing the assets in order to take advantage of the tax rate. For instance, the company might take lease of an asset in one country, which is flexible in the treatment of the capital asset expenditure and the profits received by the company. Hence, the generous assistance of that country in the management of the transactions would allow the company to generate a significant straight tax loss on the agreement of the business (Murphy, 2012). From t he above example, I feel that tax arbitrage is a common thing in the present day scenario of a business. Many companies with a view to earn maximized profits utilize the practice of purchasing similar type of assets from different locations to save the taxes on the transaction. According to my view, the tax structure of Apple with the Irish government has helped the company to pay comparatively lower rate of tax in Ireland. Apple has formed two supplementary entities in Ireland. These subsidiary entities are named as Apple Sales International and Apple operations Europe, which possess majority of the companys assets. Apple Inc. in Ireland provides the license for selling phones to other subsidiaries in the global market. For example, if iphone is sold in China, the subsidiaries of Apple present therein would have to pay for using the property of the Irish company. So, the profit earned by providing license to the global subsidiaries would ultimately come to Irish subsidiary. Therefore, the profit generated from the different subsidiaries of Apple gets taxed at low rate in Ireland. This allowed the company to get benefits on taxes from such tax agreement with the Irish government (Taylor, 2016). From the above scenario, I can say that that Apple was not guil ty of practicing tax arbitrage in Ireland and instead continued to pay the corporate taxes as per the tax structure agreement that had been fixed between the company and Irish government European Union (EU) and Its Decision on Apple Yes, I think that EU has been unfair with Apple and this can be seen from the criticisms related to the European Unions decision on Apples operations in the global market. According to European commission, Irish government has allowed Apple to pay a comparatively lesser amount of corporate tax on the business operations. The government of Ireland and Apple have disagreed with the allegation of EU also decides to make an appeal against it. EU, therefore states that the company only paid 1% corporate tax in place of 12.5%, which is a standard rate of tax in Ireland for the corporate bodies. The government of the United States of America has responded that retroactive tax assessment made by EU is unfair and is discouraging the capability of the US companies to fight economically in Europe. The Irish government also seeks an approval from the Irish cabinet for the appeal against the allegations. 90%of the profits of Apple generated from the outside countries are legally treated in the Ir eland. Thus, this shows that EU was unfair with the performance of Apple on imposing 13bn as tax for breaking the state aid laws (BBC, 2016). The CEO of Apple, Tom Cook has mentioned several points regarding the operations of Apple in Europe which includes the following: The company had started business 36years ago in Europe, when iphone was not even introduced The company at that time was able to provide employment opportunities to more than six thousand people across Ireland The success of the company has been able to create more than 1.5 million jobs in the Europe. The company has always performed its role as a responsible corporate body and has even contributed largely towards the community and the nation The growing business has positioned the company as the major taxpayers in Ireland and even globally. The instructions and guidance of the Irish government regarding the operation of the business has been followed by the company to comply with the different types of tax rules (Source: Toor, 2016) Therefore, I feel that the claim of EU on Irish government favoring Apple on tax laws is baseless and would cause a disturbing environment pertaining to the sovereignty of the member states of EU on tax rules. Summary on Who Would Receive the 13bn That Apple Have Been Ordered To Pay I believe that, the amount paid by Apple as tax penalty must be received by the government of Ireland. Imposing back taxes on Apple according to EU means that the company has not been paying the real corporate tax rate of 12.5% as per then tax norms of Ireland. An investigation by the European commission has revealed that Apple pays only 0.005% tax on a regular basis, which is even lesser than the actual corporate tax rate. It is also comprehended that the selective treatment of the Irish government towards Apple has permitted the company to pay such lower rate of tax. The European commission has started rewriting the history of Apple regarding the negligence in paying taxes in Ireland and not following the International tax system (Baird, 2016). As per me, Apple in Ireland might have to incur $14.5 million as tax fine. The amount paid by Apple as tax has been found as 1% in 2013 out of 12.5 % of the corporate tax. The money would be payable by Apple to the government of Ireland as a compensation for not contributing the real amount of corporate tax. Hence, I think that, the decision by the European Commission has been seen as a controversial issue in the world. The taxation commissioner of EU has stated that such flexible treatment on tax would let the local small companies of Europe suffer in competing with the rivals in the market. For every 1 million profit, the company only paid 500 as tax, which is even less than 1% (Meyer, 2016). View from Investors Perspective on Apple Case As an investor, I suppose that the European Commissions tax penalty on Apple displays the dull reputation of the EU. I believe that the case of Apple would not stop the company from investing in its target market of Ireland and I would considerably purchase the shares of the Apple in the near future. My opinion is that the lowest corporate tax rate of 12.5% in the Western Europe has made Ireland the ultimate destination for the foreign companies to invest their capital therein. Thus, every investor think that the low relocation cost and tax would always attract the global investors to Ireland (Doyle Flanagan 2016). I consider that the penalizing Apple for tax arbitrage would not be a fair option to be undertaken by the EU. The tax arrangement of Apple with the Irish government is a part of an agreement and should not impose a tax punishment to the company. Apple has always operated its business by following the rules and regulations. Therefore, European commission is not able to control the federalism agenda and Apple has been penalized as it is one of the largest companies in the world with sound reputation in the international market (The Irish Times, 2016). My views say that, European Commissions decision of penalizing Apple if gets successful, the Irish government fund would get boosted, but the reputation of becoming good destination for the investment may not exist for the longer period of time. After Brexit, the EU has no authority on the corporate tax on United Kingdom and it could be a new choice for the investors like me to invest for future profit generation. There can be a willingness of outside country to invest openly in United Kingdom than the other EU countries. The amount of tax, if paid by Apple to the government of Ireland would then have been more than the government spending on countrys health services (The Guardian, 2016). Impact of Apple Case on Foreign Direct Investment (FDI) On Ireland and EU In my opinion, the Apples case related to tax arbitrage would make a mixed impact on the foreign direct investment of Ireland and EU. Fiscal position of Ireland may get improved with the decision of European commission, but it may lead to an economic uncertainty in the medium term. The global investors may not see Ireland as the suitable destination for the FDI in case Apple is found guilty. Hence, there are possibilities of unstable political situation and economic impact of Apple case in Ireland and EU (RTE, 2016). I believe that the commissions decision on Apple case would hamper the FDI investment and hence the possibility of job creation in open economy would be less. Thus, Irelands image in the global market would tarnish as a result of which the outside country would show less interest in the building of financial infrastructure into the country. The ruling of EU has made an awkward environment for the foreign investors who mostly belong to the English speaking nations. The FDI of Ireland is 500% of the countrys economy and is considered to be the second largest in the European Union. The Ireland and EU may have to face the risks of losing its foreign investors, who facilitated the employment opportunities in Ireland (The Business Times, 2016). As per my understandings, the relation between the EU and the United States of America may also get affected with the Apple case in Ireland. The US investors and the US house representatives have stated that the decision of European commission to impose penalty on Apple is awful. The case of Apple would send a wrong message to the global investors such as United States of America, an English speaking country and might even have an impact on the job opportunities in the open economy. Therefore, there are possibilities that the American companies might start investing more on their home county rather than in FDI of EU and its member states. The FDI of Ireland and EU might even get affected in future after the case of Apple in Ireland as many multinational companies operating in Ireland are from the United States of America, who had opposed the decision of the EU for penalizing Apple (Financial Times, 2016). References Baird, R 2016. Apple Ordered To Pay Ireland 13bn In Back Taxes By EU Regulators, International Business Times, viewed 9 October 2016, https://www.ibtimes.co.uk/apple-ordered-pay-13bn-back-taxes-by-ec-1578709 BBC 2016, Europe's 'Unfair' Apple Tax Ruling Sparks US Anger, Business, viewed 9 October 2016, https://www.bbc.com/news/business-37226101 Doyle, D Flanagan, P 2016, Apples European Tax Woes Put Dublins Googletown on Edge, Market, viewed 9 October 2016, https://www.bloomberg.com/news/articles/2016-09-08/apple-s-european-tax-woes-leave-dublin-s-googletown-on-edge Financial Times 2016, Apple Hit With 13bn EU Tax Penalty Over Illegal Irish Aid, Home, viewed 9 October 2016, https://www.ft.com/content/b573ac02-6e90-11e6-a0c9-1365ce54b926 Meyer, D 2016, Here's What You Need To Know About Apple's $14.5 Billion EU Tax Bill, News, viewed 9 October 2016, https://fortune.com/2016/08/30/apple-tax-ireland-ruling/ Murphy, R 2012, How Companies Avoid Tax A Quick Summary In 8,000 Words, Tax Research UK, viewed 9 October 2016, https://www.taxresearch.org.uk/Blog/2012/01/06/how-companies-avoid-tax-a-quick-summary-in-8000-words/ RTE 2016, Apple Ruling Has 'Mixed Implications' For Ireland Fitch, News, viewed 9 October 2016, https://www.rte.ie/news/business/2016/0905/814343-fitch-apple/ Taylor, H 2016, How Apple Managed To Pay A 0.005 Percent Tax Rate In 2014, Technology, viewed 9 October 2016, https://www.cnbc.com/2016/08/30/how-apples-irish-subsidiaries-paid-a-0005-percent-tax-rate-in-2014.html The Business Times 2016, Apple's European tax woes leave Dublin's 'Googletown' on edge, Government and Economy, viewed 9 October 2016, https://www.businesstimes.com.sg/government-economy/apples-european-tax-woes-leave-dublins-googletown-on-edge The Economics Times 2016, Definition of 'Arbitrage', Equity, viewed 9 October 2016, https://economictimes.indiatimes.com/definition/arbitrage The Guardian 2016, The Apple Tax Ruling What This Means For Ireland, Tax And Multinationals, Business, viewed 9 October 2016, https://www.theguardian.com/business/2016/aug/30/eu-apple-ireland-tax-ruling-q-and-a The Irish Times 2016, Denis OBrien: Apple Should Not Be Punished Over Tax, Business, viewed 9 October 2016, https://www.irishtimes.com/business/economy/denis-o-brien-apple-should-not-be-punished-over-tax-1.2798706 Toor, A 2016, Read Apple's Letter To Europe On Irish Tax Decision, The Verge, viewed 9 October 2016, https://www.theverge.com/2016/8/30/12707932/apple-tim-cook-ireland-tax-european-commission