Explain the concept of an advance pricing arrangement.
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Initial Concepts
Tax neutrality
Taxes have no effect on resource-allocation decisions. Business decisions driven by economic fundamentals. Should result in optimal allocation of resources.
Imposed on transfers of assets between taxpayers
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Diversity of National Tax Systems (contin)
Tax burdens
Vary internationally due to: Differences in statutory tax rates Differences in definitions of taxable income How social overhead costs are paid for in a country
▪ Lower direct taxes may result in higher indirect taxes ▪ Or fewer and lower-quality public services that increase other
costs
Effective tax rates seldom equal nominal tax rates Thus, a low tax rate does not necessarily mean a low tax
Identify the major variables that complicate international transfer pricing.
Explain the meaning of arm’s-length price and the transfer pricing methods designed to achieve it.
Value-added tax
Consumption tax found in Europe and Canada Levied on value added at each stage of production or distribution Consumers ultimately bear the cost
burden
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Diversity of National Tax Systems (contin)
Tax equity
Similarly situated taxpayers pay same tax Is a foreign subsidiary a domestic company operating abroad? Is a foreign subsidiary a foreign company owned by a domestic one?
Identify the major types of tax systems that exist around the world.
Understand what determines a multinational entity’s effective tax burden.
Understand concepts relating to the taxation of foreign source income and the rationale behind the foreign tax credit.
▪ Pressure to improve competitiveness of a country’s businesses and create an attractive investing environment
▪ Driven by integration of the world economy and ability of businesses to move from high- to low-tax countries
International Accounting, 6/e Frederick D.S. Choi Gary K. Meek
Chapter 12: International Taxation and Transfer Pri
Learning Objectives
Withholding tax
Imposed on dividend, interest, and royalty payments to foreign investors Withheld at the source Often modified by bilateral tax treaties
Disagreement over how to interpret this concept
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Diversity of National Tax Systems
Types of taxes
Corporate income tax
First or second most widely used tax Trend toward lowering and converging of income tax rates
Border tax
Customs or import duties First or second most widely used tax Designed to keep domestic goods price competitive with imports
Transfer tax