International Finance and Taxation Systems

1. A value-added tax is a form of tax that operates at several different stages. Nakhcian (2013) defines a value added tax as a “multi-stage tax system, which is received at different stages of the production-distribution chain based on a percentage of value added to manufactured goods or services”. In practice, a value added tax functions by distributing the determined tax percentage across the distribution-production chain by requiring each level in the chain to pay a stated portion of the tax. To illustrate, we can use the example of an apple in order to clearly see how a VAT would function in modern society. 

In order for a VAT to function in real life, it requires each level or stage of the production chain to pay the tax itself. In the example of an apple, we could a VAT functioning as follows: a farmer or grower would sell the fruit to a supplier or wholesaler for 20 cents. If the VAT were a flat 10 percent, the supplier would pay 22 cents to the grower. The farmer, then, would allocate 2 cents (or 10% of the total value of the purchase) and pay that in tax to the state. At the next stage, the supplier would sell to the supermarket or store and charge a dollar, or 100 cents. The store would have to pay the supplier 110 cents for the apple. Naturally, 10 of those cents are allocated to the VAT. When the apple finally reaches the consumer, we can assume this hypothetical store offers apples for 2 dollar, or 200 cents. Given the VAT of 10 percent, the apple would sell for 220 cents. All along the distribution chain, the VAT functions as a mechanism to provide revenue to the state based on the value creation that is added to the product at each level of production and distribution.

2. Raising capital through equity and raising capital through debt are very different. Equity is the value of asset that is determined by the monetary amount an individual will offer for it. When it to raising capital, firms can, in effect, sell equity and receive cash in compensation. Raising capital through equity involves either selling shares of the company in order to raise cash, or some other form of private investment based on the perceived value of the company. Debt financing, on the other hand, is the raising of capital through external loans from banks or the sale of bonds (Erel, 2012).

In practice, debt financing ensures that companies not only retain ownership of their operations but remain liable for only the money borrowed. If a loan is received from a bank through debt financing, a corporation need only repay the stated amount plus whatever interest was agreed upon. An equity based approach toward raising capital means that a company does not maintain an external need to repay its monetary obligations but rather sells stake in its ownership and decision-making in favor of placing the risk of the debt on the various investors and individuals who choose to buy stock in the company. 

3. International debt markets have several important characteristics. International debt markets are markets designed to facilitate the trade of bonds from outside the United States. In practice, this means that state governments such as the United States raise money by issuing bonds to investors. Likewise, corporations can do the same by issuing bonds to investors. Moreover, the international bond market is further defined by the fact that investors can purchase bonds in foreign governments that allow for increased diversification of investment returns. Returns on foreign bonds can be significantly higher than U.S. treasury bonds, thereby allowing investors the ability to invest in alternative currency options that allow for higher yields on investments (Fox, 2009). 

However, the international debt market is not without its downsides. First, changes in relative value of currency carries the inherent risk of transactional and translational exposure. Fluctuations in the conversion rate of domestic currency to foreign money and likewise can create situations in which capital can be invested in long-term assets overseas that are incapable of achieving immediate positive returns if the value of a currency drops substantially. Lastly, riskier bonds can result in higher returns, but carry inherent exposure risks. Overall, U.S. treasury bonds are widely regarded as the safest of international bonds.

4. Global business strategies regarding tax systems can be largely divided into two types: territorial and residential. For territorial tax systems, the only taxable income is that that originates within the confines of the individual’s state or nation. In this case, which is most often seen in Africa, Latin America, and South America, territorial taxation is limited to only internal sources within a country. For residential taxation, inhabitants of a state are instead taxed on global income, or income that originates from all sources and not merely domestic investments, salaries, and so forth. In order to prevent double taxation and other economic hardships, states often use tax breaks, incentives, and other forms of deductions and credits. 

Barker (2007) argues that the best form of international taxation would be to move away from territorial and favor a modified residential approach. As “freer trade and freer factor mobility have made the traditional territorial notion of source taxation obsolete”, it is logical that “emerging economies should recognize that source taxation” must instead be looked at holistically and include revenue streams of “imported capital” from all angles and sectors of possible investment (p. 352). Thus, most modern states have moved away from the obsolete model of territorial taxation and instead adopted a more comprehensive, yet more complicated, form of global tax systems. 

5. The benefits and drawbacks of cross-listing on multiple stock exchanges are many. First, the advantages include allowing trade to occur all across the globe and constantly, without the need to wait for the market to open in a particular geographic region. This allows companies greater movement and the ability to constantly update its stock offerings and pricing models based on global trends. A company that trades on multiple stock exchanges is a company that can interact with the global marketplace in constant, real-time situations. Moreover, trading on multiple stock exchanges means a firm can operate in multiple currencies, which is a powerful tool to attract bond buyers and investors who want diverse portfolios of varying currencies, many of which have variable rates of return and conversion ratios back to the home currency. Disadvantages, however, are numerous. Multiple stock exchanges means that a firm must report its financial information to a myriad  of different regulatory agencies depending on the region of the market, there is a greater risk of stock price variation (positive or negative) when the shares are traded around the clock, and a presence in the global marketplace means a firm that trades in many exchanges in more subject to financial critique. (Benos & Weisbach, 2004). 

References

Barker, W. B. (2007). An international tax system for emerging economies, tax sparing, and development: It is all about source! University of Pennsylvania Journal of International Law, 29(2), 349-389.

Benos, E., & Weisbach, M. S. (2004). Private benefits and cross-listings in the United States. Emerging Markets Review,5(2), 217-240. Doi: 10.1016/J.Ememar.2004.01.002

Erel, I., Julio, B., Kim, W., & Weisbach, M. S. (2012). Macroeconomic conditions and capital raising. Review of Financial Studies, 25(2), 341-376.

Fox, J. (2009). Bond bust ahead. Time, 174(13), 22.

Nakhchian, A., Gorji, N., Shayesteh, T., & Sheibany, E. (2013). Value added tax and its relationship with management information technology. Interdisciplinary Journal of Contemporary Research in Business, 4(9), 402-409.