Tax Management and Exchange-rate Risk

Tax plays an important role in corporate management. Tax can influence on strategic planning, cash flow and investment. Tax is treated as cost. In order to maximize shareholder’s wealth, companies try to avoid or decrease tax burden. Meanwhile, by reduction of tax, company can obtain low cost and design a competitive price to obtain competitive advantage. To achieve this objective, multinational enterprises which have capability and expertise can utilize subsidiaries or joint ventures to re-structure, transactions, or transfer pricing.

The multinationals, Starbucks, Google and Amazon were explored by newspaper. Especially Starbucks’ profit in UK creates 3.1billion pounds in past three years. But it just contributes 8.6million taxes. People in UK are angry about Starbucks and appeal to resist Starbucks. They think Starbuck escape the responsibility for society. In order to deal with resist, Starbucks makes a commitment which it will pay 20 million pounds of incomes taxes, and this money has exceeded the legal payable taxes. Google and Amazon have same situation with Starbucks. They are all legal. Google takes advantage of its subsidiaries which locate in Ireland to obtain a low tax rate. Amazon utilizes its subsidiaries which located in tax haven Luxembourg. (BBC, 2013)

In these cases, personally, in order to obtain high profit and competitive advantage, companies are motived to avoid taxes by legal means. However, while financial managers catch low payment tax, the reputation is damaged. As Starbucks, people began to resist it. The company is regarded as irresponsibility for society. Meanwhile it is not an ethical behavior. In order to repair reputation, company has to pay more money. Thus tax is a complex problem. Companies should make a balance between their benefit and society responsibility.

Nowadays, more and more multinational companies appear. Within international trade, they face exchange-rate risk. There are three type risk which is transaction risk, translation risk and economic risk. Transaction risk is associated with imports or exports. The firm may have a commitment in a foreign currency and will have a variable value because of exchange-rate movements. Translation risk arises because financial data denominated in one currency are then expressed in terms of another currency. Income, expenses, assets and liabilities which is overseas have to be re-expressed in terms of home currency. In respect of economic risk, a firm’s economic value may decrease as a result of forex movements causing a loss in competitive strength. In order to decrease risk, companies can utilize hedge such as Netting, Matching, Futures Hedge, currency option hedge.

Recently, Japanese government reduce JPY Exchange Rate. JPY Exchange Rate has reduced 10% since on January 2013. (Financial Times, 2013) This measurements support increase of company competitive such as Toyota and Panasonic. This leads Japanese products have lower price than other countries. However, the price of import energy source will increase sharply. These companies who need to import source will increase their cost. If these companies does not use hedge, because of increase of exchange rate, they may suffer large loss.