INTERNATIONAL BUSINESS AND TRADE

PART 2: MIDTERM PERIOD

Course Topic

Risks in International Business

● Government risks
● Law risks
● Political risks

Entering the International Market

● Concerns and Issues of going International

● Marketing
● Product, Price, Place, Promotion

International Accounting, Finance, and Taxation

● The Environment of Global Financial Markets

● The Environment of International Financial Accounting
● International Taxation
● Auditing in International Environment

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GOVERNMENT RISKS

Peter Eigen’s Statement on Corruption:

Peter Eigen, Chairman of Transparency International, criticized politicians and public officials
from leading industrial countries for ignoring corruption and the bribe-paying activities of
multinational firms headquartered in their own countries.

Government’s Role in International Business:

● The role of the government in international business, trade, and investment is crucial.
● Historically, corruption in governments was seen as undesirable but inevitable and not
highly harmful.
● This attitude has changed: corruption is now viewed as harmful, reducing economic growth
and destabilizing governments.

Corruption:

● Erodes respect for the law and deters honest individuals from public service.
● Leads to over-invoicing, substandard work by contractors, and reduced tax revenues.
● Undermines environmental and building code regulations.
● Discourages foreign direct investment in developing countries.
● Facilitates other crimes, such as drug trafficking.

Definition of Corruption

Corruption is broadly defined as the abuse of public or private office for personal gain. It can
range from petty bribery to large-scale embezzlement.

Global Response to Corruption:

● The international community is insisting on the eradication of corruption in poorer countries,

especially for those seeking Western aid.
● Despite this demand, there is hypocrisy within the international community, particularly
concerning taxpayer-backed export credit agencies in industrialized countries.

Bribery as a Global Issue: From 1994 to 2001, the US government received reports of 400
international cases involving bribery, worth a total of US$200 billion. Between May 2001 and
April 2002, the US government learned of 60 contracts, totaling US$35 billion, affected by
bribery. 70% of the bribery allegations from 2000–2001 involved companies from countries that
had signed the OECD’s 1997 anti-bribery Convention.

Corruption in the 1990s: Corruption scandals in the 1990s across France, Brazil, Japan,
Pakistan, and other countries demonstrated the widespread nature of corruption, even in
democracies.

Strategies to Combat Corruption: In recent years, government leaders and nongovernmental

organizations (NGOs) have developed strategies to expose and combat corruption.

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Transparency International (TI): A global organization with 80 chapters that builds anti
corruption coalitions with governments, businesses, and civil society.

World Bank and International Monetary Fund (IMF): Focus on introducing reforms in
developing countries to address the demand side of bribery. They may reduce or eliminate aid
to countries with high levels of corruption where governments are not implementing reforms.

UN and Global Anti Corruption Efforts: In 1996, the UN General Assembly approved a code
of conduct for public officials and called for member states to make bribing public officials a
crime. Corruption reform programs have been successful in exposing government bribery
through National surveys and report cards detailing specific instances of corruption. "Big Mac
Indexes" highlighting suspicious cost differences for similar commodities, e.g., school lunches or
aspirin.

Transparency International / Argentina Example: Conducted a Big Mac survey, revealing that
a school lunch in Buenos Aires cost $5. A comparable lunch in Mendoza, where anti corruption
measures were in place, cost 80 cents. Following the publication of these findings, the cost of a
school lunch in Buenos Aires was halved.

World Bank Research on Kickbacks in Former Soviet Union Countries: 35% of foreign
companies operating in former Soviet Union countries admitted to paying kickbacks for
government contracts.

Among the worst offenders: 42% of US companies reported paying bribes, 29% of French
companies, 21% of German companies, and 14% of British companies. In countries with high
levels of corruption, over 50% of multinational corporations admitted to paying public
procurement kickbacks.

Gallup International’s "Voice of the People" Survey (2002): 40,838 people were surveyed
across 47 countries. Conducted on behalf of Transparency International (TI), including
questions from the Global Corruption Barometer survey. An additional 1,315 adults were
surveyed in the Palestinian Authority by the Palestinian Center for Policy and Survey Research
in April 2003.

Political Parties and Corruption: According to the survey, political parties have the highest
percentage of corruption, followed by the justice system (courts) and the police. These areas
are crucial for international business, with significant political and legal implications.
Multinational corporations (MNCs) need to be aware of these corruption-related ethical and
moral issues.

Public Perception of Future Corruption: When asked about future corruption levels: 40.7%
respondents expected corruption to increase over the next three years, 19.3% believed that
corruption would fall, 26.3% expected corruption to stay the same, and 13.7 did not have a
response. In Colombia and Indonesia, respondents were the most optimistic, with a majority
expecting corruption levels to decrease.

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A clear majority of people in countries like Cameroon, Georgia, India, Israel, Netherlands,
Norway, South Africa, and Turkey expected corruption to increase in their countries.

Transparency International’s Bribe Payers Index: Transparency International publishes the

Bribe Payers Index (BPI), which ranks countries based on how many bribes are offered by their
international businesses, focusing on the supply side of corruption.

LAW RISKS

Law is a system of rules which a particular country or community recognizes as regulating the
actions of its members and which it may enforce by the imposition of penalties.

Abstract: Law Risk terminology refers to the specific risks associated with legal exposure and
compliance; It includes the possibility of legal actions due to non-compliance with laws,
regulations, or contractual obligations. Law risk encompasses issues like litigation, fines, and
reputational damage stemming from legal challenges.

Laws exist to provide a framework for behavior, ensuring order and predictability in society. In
the context of international business and trade, laws serve several key purposes:
● Protection of Rights: Laws safeguard the rights of businesses and individuals, including
intellectual property rights, contract enforcement, and consumer protection. This fosters trust
and encourages investment.
● Avoidance of Conflicts: Legal frameworks help prevent disputes by establishing clear rules
governing transactions. They outline obligations and rights, reducing the likelihood of
misunderstandings and conflicts between parties.
● Risk Mitigation: Compliance with laws minimizes legal risks, such as fines, penalties, or
litigation. Businesses can navigate complex regulations, such as trade tariffs and export
controls, thereby avoiding costly mistakes.
● Regulatory Compliance: Laws ensure that businesses adhere to standards related to labor
practices, environmental protection, and fair competition, promoting ethical practices and
sustainability.
● Facilitation of Trade: International trade agreements and laws create a stable environment
for cross-border transactions, reducing barriers and enhancing economic cooperation
among nations.

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Introduction: Nature of Law
A domestic firm must follow the laws and customs of its home country. An international business
faces a more complex task: It must obey the laws not only of its home country but also of all the
host countries in which it operates. The laws of both the home and the host countries can affect
directly and indirectly the international companies and the way they conduct their business.
These laws determine the markets the firms serve, the cost of goods and/or services they offer,
the price they charge, and costs for labor,raw materials, and technology.

Challenge: International Disputes

International disputes refer to conflicts that arise between states, corporations, or individuals
across national borders. These disputes can involve various issues, such as trade, investment,
environmental concerns, human rights, and territorial claims.

The presence of an agreement to oversee trade does not mean that there will be no conflict
between countries. There is considerable trade and legal disagreement among countries.
Resolving any disputes across borders is very complex. Partly, this is because a trade conflict
might be treated differently by international and domestic laws.

An important question in situations like this is:

Where should the issue be resolved? Which court or country has or should have jurisdiction in
circumstances like this?

Legal Environment: Closely related to the political system, the legal system is another
dimen-sion of the external environment that influences business. Managers must be aware of
the legal systems in the countries in which they operate; the nature of the legal profession, both
domestic and international; and the legal relationship that exists between countries.

Legal systems usually fall into one of three categories: common law, civil law, and theocratic
law.

Common Law: Common law is based on tradition, precedent, and custom and usage.

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Civil Law: A civil law system, also called a codified legal system, is based on a detailed set of
laws organized into a legal code. Rules for conducting business transactions are a part of the
code.
Theocratic Law: This law is based on the officially established rules governing the faith and
practice of a particular religion.

Considering differences in laws and regulations from country to country are numerous and
complex. These and other issues in the regulatory environment that concern multinational firms.
Thus, Countries often impose protectionist policies, such as tariffs, quotas, and other trade
restrictions, to give preference to their own products and industries.

Direct Importance of Law both International and Domestic Landscape:

● Regulatory Compliance: Laws provide a framework that businesses must follow to operate
legally. Compliance with regulations prevents legal penalties, fines, and reputational
damage.
● Contract Enforcement: Law governs contracts, ensuring that agreements between parties
are enforceable. This is crucial for business relationships and transactions.
● Risk Management: Understanding legal obligations helps businesses identify and mitigate
risks related to liability, disputes, and compliance, ultimately protecting their assets.
● Intellectual Property Protection: Laws safeguard intellectual property, allowing businesses
to protect innovations, trademarks, and copyrights, which are vital for competitive
advantage.
● Consumer Protection: Laws ensure that consumers are treated fairly, mandating
transparency and accountability in business practices. This builds trust and enhances brand
loyalty.
● Dispute Resolution: Legal frameworks provide mechanisms for resolving disputes through
litigation, arbitration, or mediation, facilitating conflict resolution and protecting business
interests.
● Employment Law: Understanding labor laws is essential for managing employee relations,
ensuring fair treatment, and avoiding disputes related to employment practices.
● International Trade: For international business, understanding trade laws, tariffs, and
regulations is vital for successful operations across borders and for navigating complex legal
landscapes.

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● Corporate Governance: Laws dictate how companies are structured and governed,
ensuring accountability, transparency, and ethical behavior in corporate practices.
● Global Standard and Ethics: Adhering to legal norms helps businesses operate ethically,
aligning with global standards and fostering positive relationships with stakeholders.

The importance of law in both domestic and international business cannot be overstated. It
provides essential guidelines for operations, promotes fair practices, and protects the interests
of all parties involved, ultimately contributing to sustainable business success. International
managers can better navigate the complexities of the legal environment and enhance their
chances of success in global markets.

POLITICAL RISKS

Political risks are the actions by groups of people or governments that have the potential to
affect the immediate and/or long-term viability of a firm. This definition encompasses a large
number of events—all the way from a revolution that results in confiscation of a firm’s operations
down to small changes in the tax code.

Political/Economic Environment Risk

The political and economic environment of a country plays a crucial role in determining business
risks for MNCs. Risks such as nationalization (expropriation or confiscation) and broader threats
like civil wars, terrorism, and political instability are key factors companies must consider when
entering new markets. The recent rise in nationalism, terrorism, and civil conflicts further
escalates these risks.

● Political/Economic Variables: These include factors like government stability and political
system changes, which present risks for multinational corporations (MNCs).
● Nationalization: One of the biggest risks is nationalization, where governments take control
of industries or companies. If compensation is given, it's called expropriation; if little or no
compensation is provided, it's known as confiscation.
● Instability and Risks: Countries with unstable political systems, poverty, or suspicion
toward MNCs are more likely to expropriate or confiscate foreign assets. These risks are
heightened in regions affected by civil wars, terrorism, or nationalism, such as Afghanistan,
Iraq, and the former Soviet Union.

Domestic Economic Conditions

Domestic economic conditions, including purchasing power, infrastructure, and legal

regulations, significantly impact the risk faced by MNCs in foreign markets.

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● Economic Conditions: Factors such as per capita income, economic growth, and
infrastructure availability (roads, airports, etc.) in a host country influence the risk for MNCs.
Strong infrastructure generally lowers risk and supports business expansion.
● Environmental Regulations: Legal regulations on environmental pollution can increase
operational costs for MNCs, affecting business operations for countries with strict
environmental laws.
● Ethical Concerns: MNCs may choose to operate in countries with weaker environmental
restrictions to reduce costs, raising ethical concerns about exploiting lax laws.

External Economic Relations as Risk Factors

External economic relations present risks for foreign MNCs due to tariffs and import restrictions,
which countries use to protect their local industries and pressure foreign markets. Health and
safety concerns can also lead to import bans.

● Economic Relations: Countries maintain restrictions on external economic relations, often

through measures like tariffs and import limits.
● Tariffs: Tariffs are taxes on imports that raise the price of foreign goods, making domestic
products more competitive. This protects local industries but poses risks for foreign
multinational corporations (MNCs).
● Import Restrictions: Countries may limit imports for various reasons, such as protecting
local industries, pressuring other countries to open markets, or safeguarding public health.
● Health and Safety Concerns: Countries can ban imports that pose a threat to their citizens'
health, requiring foreign producers to comply with local regulations.

CONCERNS AND ISSUES OF GOING INTERNATIONAL

Most companies are established with the ambition to serve a particular market/consumer need
within a given national market. However, as the activities of some of these companies expand
and if their products appear to have a very strong appeal to a certain market segment or they
are substantially differentiated from their competing products or services, these companies are
faced with a situation where they are asked to serve some customers abroad and deliver their
products or services to a foreign and distant market.

International marketers have to make a multitude of decisions regarding the entry mode, which
may include the target product/market, the goals of the target markets, the mode of entry, the
time of entry, a marketing mix plan, and a control system to check the performance in the
entered markets.

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Initial distinctions to consider:

Option to export and distribute certain products or services in a foreign market.

Option to develop a production basis in the foreign market along with marketing activities.

Alternative methods for foreign market entry:

1. Production in home market

Indirect export

● Trading company
● Export management company
● Piggyback

Direct Export

● Foreign distributor
● Agent
● Marketing subsidiary

2. Foreign production sources

● Contract manufacture
● Licensing
● Assembly
● Joint venture
● Full ownership

Some entry modes, such as exporting and licensing, are associated with low levels of control
over operations and marketing, but are also associated with lower levels of risk. In contrast,
other entry modes such as joint ventures and full ownership of facilities involve more control, but
entail additional risk.

Most classifications of decision criteria for mode of entry list the following criteria:

- Market size and growth

- Risk
- Government regulations
- Competitive environment
- Local infrastructure
- Company objectives
- Need for control
- Internal resources
- Assets and capabilities
- Flexibility

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Marketing

Marketing is vital to the success of an organization in today’s competitive world. This course
introduces marketing, the marketing mix (the Four Ps), the strategic importance of marketing,
and customer values and satisfaction. Plus, you will dive into marketing planning, including
market research, pricing, distribution and targeting!

WHAT IS MARKETING?

● Marketing is the activity, set of institutions, and processes for creating, communicating,
delivering, and exchanging offerings that have value for customers, clients, partners, and
society at large.
● Marketing encompasses every part of a plan to turn a prospective consumer into a happy
and satisfied customer. It includes everything from market research to advertising. The goal
of marketing is to convince a person that your product is worth investing in, establish brand
loyalty and increase overall sales.

MARKETING RESEARCH
● Marketing research is the function that links the consumer, customer, and public to the
marketer through information used to identify and define opportunities and problems;
generate, refine, and evaluate actions; monitor performance; and improve understanding of
it as a process. It specifies the information required to address these issues, designs the
method for collecting information, manages and implements the data collection process,
analyzes the results, and communicates the findings and their implications.

THE 4P’S OF MARKETING

1. Product: What are you offering? It can be a physical product, digital item, service, event
or experience. Curate the key features of your product and define what makes it unique
in your market.

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 2. Price: What are you charging for your product? Calculate this by determining your net
cost of goods and then adding on an additional amount to meet your desired profit
margin.
3. Place: Where do you sell your goods? For example, you may have a brick-and-mortar
store or an e-commerce platform. Where you sell determines where and how you market
your product.
4. Promotion: How do you get the word out about your products? This is usually a mix of
various marketing strategies, including paid advertising, content marketing, social media
marketing and more.

THE 4C’S OF MARKETING

● Customer
● Cost
● Convenience and Communication

DIFFERENT TYPES OF MARKETING

1. Digital Marketing: Uses online channels like websites, social media, and email to reach
customers.
2. Content Marketing: Focuses on creating and distributing valuable content to attract and
engage a target audience.
3. Social Media Marketing: Utilizes platforms like Facebook, Instagram, and Twitter to
promote products and engage with customers.
4. Email Marketing: Involves sending targeted emails to prospects and customers to
promote products or services.
5. Search Engine Marketing (SEM): Increases visibility on search engines through paid
advertising and search engine optimization (SEO).
6. Influencer Marketing: Partners with influencers to promote products to their followers.
7. Affiliate Marketing: Rewards affiliates for driving traffic or sales to a company’s website.
8. Guerrilla Marketing: Uses unconventional and creative tactics to promote a product or
service.
9. Event Marketing: Promotes products through events like trade shows, webinars, and
conferences.
10. Traditional Marketing: Includes offline methods like TV ads, radio spots, print ads, and
billboards.

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MARKETING BEST PRACTICES

● Define your goals. Before you start any campaign, think about what you want to get out of
it. Increased sales? More page views? More email newsletter sign-ups? Establishing a goal
helps you better measure the efficacy and ROI of your campaign and it’ll help you know
what you can improve on next time.
● Define and study your target demographics. Think about who would benefit most from
your products. You might even be able to gather this data from your existing sales
database. It may help to create a customer profile for each segment of your target audience
and use that when crafting content for your campaigns.
● Plan out your campaign. Always create a guideline to follow throughout the campaign and
make sure you have all of the assets you’ll need ready to go.
● Start soft, then follow up. This delves into inbound marketing, which is an approach
where you create curated content for the user rather than generic ads catering to the
general public. Lure in potential customers with interesting content that’s not necessarily
sales-y. Then, as the consumer progresses through the marketing funnel, be aggressive
with your calls to action.
● Offer a discount or coupon. Discounts can count toward your marketing budget, and they
offer peace of mind to consumers who are on the fence.
● Analyze to see what’s working. Services such as Google Analytics or HubSpot can help
you track page views and interactions with landing pages and ads. Crunch the numbers to
see which parts of your campaign were most effective, and use this data for future
marketing.

BENEFITS OF MARKETING

● Increases your sales. It’s hard to say exactly how much marketing will improve your sales.
But putting your products in front of your target audience is very likely to boost your
purchase rate.
● Curates a stellar reputation. If your company becomes known for having excellent
customer service (not to mention a dash of cunning) on social media, it can help unaware
consumers see your brand as more reputable.
● Builds brand awareness. It takes five to seven impressions for someone to remember a
brand. Getting your brand in front of people via advertising can help your company stay
front of mind when it’s time to make a purchase.
● Helps you educate customers. In a lot of cases, customers don’t know they need your
product or service because they’re in the dark about certain facts or issues. Using
marketing as a tool to educate helps customers learn more about how your product can
help improve their lives.
● Gives you room to grow. The more your brand gets out there and the more customers
you get, the bigger your business will become. If all goes well, you might graduate from
small business to big business.

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The Global Marketing Environment

To effectively study the global environment for international marketing decisions, one must first
understand the complexity of the global marketing landscape. A key distinction arises from the
type of economic system in a country, whether it be market capitalism, centrally planned
socialism, or a mixed system. These economies can blend market forces and central planning,
depending on which element primarily governs the economy and what aspects are regulated.

Decisions and Environments of International Marketing

Some of the most common aspects of any of the targeted national settings. The following items
should be reviewed during the evaluation process.

National Market Environmental Dimensions

● Market characteristics, including technology, investments, and stock of capital goods, stage
of development, stage of product life cycle, saturation levels, buyer behavior traits, and
social/cultural aspects and the physical environment, quantity, and range of items
● Marketing institutions, specifically distribution systems and communications. Media,
marketing services (promotion, research, size of trading area, transportation systems, and
so on.
● Industry conditions, competitiveness, and technical methods development
● The legal framework (laws, regulations, codes, tariffs, taxes, etc.)

The Environment of International Financial Accounting

International financial accounting is characterized by what appears to be an almost hopeless

amount of diversity: accounting is different in every country on earth. This diversity is not as
hopeless as it appears, however. It becomes reasonable and understandable when the causes
of the diversity are explored, and clusters of similarity emerge. In addition, there is an active and
very successful international movement to harmonize accounting standards worldwide to
facilitate the cross-border flow of capital.

International Financial Accounting Diversity

One challenging aspect of international business is the fact that no two countries have exactly
the same accounting standards or procedures. What this means is that a financial statement
such as a balance sheet or an income statement prepared in the United States is prepared
under a different set of rules than a balance sheet prepared in some other country, such as the
United Kingdom. Even though these balance sheets might look the same on the surface,
comparisons between the two might be fraught with peril. In order to properly evaluate an
investment in another country, an investor must somehow translate the financial statements
prepared under a foreign set of accounting standards into financial statements in accordance
with the accounting standards of the investor's home country. This unfortunate situation is a
considerable barrier to the cross-border flow of capital.

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Causes of International Financial Accounting Diversity
International financial accounting diversity arises due to several factors that lead to differences
in accounting practices across countries. These factors include:
1. Legal Systems: Countries with different legal traditions tend to have distinct accounting
systems. For example, countries following common law (e.g., the U.S. and U.K.) focus on
investor needs and rely on market-driven disclosures, while countries with code law systems
(e.g., France, Germany) have accounting systems designed to serve government and tax
authorities.
2. Taxation Systems: In some countries, the financial accounting system is closely linked to the
tax system, meaning that financial statements are designed to minimize taxes. In others,
financial accounting is separate from tax accounting, allowing more flexibility in financial
reporting.
3. Cultural Differences: Hofstede’s cultural dimensions, such as individualism vs. collectivism
or uncertainty avoidance, can affect how financial information is interpreted and reported. For
instance, cultures with high uncertainty avoidance may prefer more conservative financial
reporting.
4. Economic Environment: A country’s level of economic development and its primary sources
of financing (e.g., equity vs. debt) can influence accounting practices. In countries where
companies rely more on banks for financing, accounting practices tend to prioritize creditors'
needs, which may lead to more conservative accounting standards.
5. Regulatory Frameworks: Different countries have varying levels of government involvement
in setting accounting standards. Some rely on independent standard-setting bodies, like the
Financial Accounting Standards Board (FASB) in the U.S., while others may have more
government control over financial reporting standards.
6. International Influences: Countries that are heavily integrated into global markets may adopt
or converge toward international standards like International Financial Reporting Standards
(IFRS). However, even then, local adaptations or variations of IFRS might exist due to specific
national contexts.
7. Education and Training: The level of professional education and training available to
accountants can also influence accounting practices. Countries with more developed accounting
professions may have more sophisticated reporting standards.
8. Political and Economic Ties: Countries with strong political or economic ties may influence
each other's accounting practices. For example, former colonies might adopt accounting
practices similar to those of their colonizing countries.
These factors combine to create diverse financial reporting practices globally, which can pose
challenges for multinational companies, investors, and regulatory bodies trying to compare
financial information across borders.

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Some Manifestations of International Financial Accounting Diversity

This financial accounting diversity among nations can be manifested in two ways: (1) differences
among clusters of nations having similar accounting practices and (2) differences in handling
specific accounting issues among countries. On a large scale, the diversity does not result in a
completely unmanageable set of differences among nations, but rather a set of clusters of
nations having somewhat similar accounting practices within each cluster, and some differences
between each of the clusters.

Consequences of International Financial Accounting Diversity

The global financial system would most likely be better off without these bumps. If the
accounting information flowed smoothly, perhaps the costs and risks of investing internationally
might be lowered. Individual investors might make better-informed decisions with access to
information, without having to translate the accounting rules of one country into the accounting
rules of another country to compare investments. Likewise, companies seeking investment
funds might be better able to find funds across borders if they did not have to incur the expense
of presenting financial information under a different accounting regime to attract investors living
in a different country.

Harmonization of Financial Accounting Diversity

Despite factors promoting accounting diversity, strong forces support the harmonization of
global accounting systems. These include cross-border financing growth, advances in
communication technology, the formation of economic blocs like the EU and NAFTA, and United
Nations efforts. In response, the International Accounting Standards Commission (IASC) was
formed in 1973 to create comparable financial statements across different national systems.
Initially, the IASC allowed flexibility in accounting methods, focusing on disclosure rather than
strict compliance. Over time, the number of permissible methods was reduced, pushing towards
more consistent global standards.

In 2001, the IASC was restructured as the International Accounting Standards Board (IASB)
with the goal of developing high-quality, enforceable global standards, promoting their use, and
converging national accounting standards with International Financial Reporting Standards
(IFRS). By 2006, many countries, including those in the EU, had adopted or allowed IFRS for
financial reporting. Although the IASB lacks enforcement power, its standards have influenced
national accounting bodies, with some countries, like the U.S., aligning their standards with
international guidelines. The U.S. has not adopted IFRS but permits foreign companies to use
them with certain reconciliation to U.S. GAAP, aiming for greater compatibility in the future.

Other Players in Financial Accounting Harmonization

In addition to the IASB, the following are the other significant players in the accounting
harmonization movement:

1. Commission of the European Union (EU)

2. International Organization of Securities Commissions (IOSCO)

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3. International Federation of Accountants (IFAC)

4. United Nations Intergovernmental Working Group of Experts on International Standards of

Accounting and Reporting (ISAR), part of the United Nations Conference on Trade and
Development (UNC-TAD)

The European Union (EU), formed after World War II, consists of 15 member states, with plans
to expand to 13 eastern and southern European countries. These members delegate some
sovereignty to EU institutions for joint interests, including accounting harmonization. The EU has
played a major role in this through its Directives, which become law in member states through
ratification.

Key Directives affecting accounting include:

1. Fourth Directive: Sets basic rules for financial statement presentation, formats, and
disclosures, introducing the "true and fair" rule, similar to U.S. standards for presenting financial
statements.

2. Seventh Directive: Requires consolidated financial statements for companies with

parent-subsidiary structures.

3. Eighth Directive: Establishes uniform auditing standards across member states.

Additionally, the International Organization of Securities Commissions (IOSCO), with over 170
regulatory organizations, aims to promote high-quality regulatory standards, share information,
ensure market surveillance, and maintain market integrity through strict enforcement.

The IOSCO is composed of over 170 various national securities regulatory organizations,
whose objectives are as follows:

● To cooperate together to promote high quality standards of regulation in order to maintain

just, efficient, and sound markets.
● To provide mutual assistance to promote the integrity of markets by a rigorous application of
the standards and by effective enforcement against offenses

International Financial Reporting

This section discusses some issues that arise in the preparation and use of international
financial statements. Two issues that arise in the preparation of international financial
statements are consolidation and foreign currency translation. Multinationals must somehow
aggregate the individual financial statements of their subsidiaries. Most likely, the multinational
has a subsidiary in each country in which it has substantial operations. This consolidation is
made even more problematic since each subsidiary may be maintaining its own accounts in its
local currency. This creates a need for foreign currency translation: converting a set of financial
statements prepared in one currency to a second currency. International auditing is then

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discussed, and the section concludes with some issues involved in the use of international
financial statements.

International Consolidations

The Coca-Cola Company operates in over 200 countries worldwide, most likely, and each
country has atleast one reporting entity and these entities must be somehow combined to form
a single consolidated set of financial statements, which are disclosed publicly.

Simply stated, consolidation involves "adding" up the accounts of two separate financial
statements, eliminating the effects of any transactions between the two entities, and producing a
single set of financial statements as if the two companies were a single entity. Consider the
balance sheets of two affiliated companies, Parent Company and Child Company found in
Exhibit 10.5

Foreign Currency Translation

Coca-Cola, operating in over 200 countries with different currencies, faces the challenge of
translating financial statements from its subsidiaries into U.S. dollars for consolidated reporting.
This raises the issue of which exchange rate to use for translation, with three main options:

1. Current exchange rate – the rate on the current date.

2. Historical exchange rate – the rate when a transaction occurred.

3. Average exchange rate – the average rate over a specific period.

Each rate has merit: current rates for current assets/liabilities, historical rates for long-term
assets, and average rates for income statement items. However, the choice of exchange rate
remains controversial in accounting, as using multiple rates often results in translation gains or
losses. These can be volatile and beyond managerial control, potentially affecting stock market
valuations. As a result, several translation methods emerged globally, including the current rate
method, current/noncurrent method, monetary/nonmonetary method, and temporal method,
each using different exchange rates for specific financial statement items.

International Taxation

International taxation governs the rules for taxing transactions that cross national borders. With
the growth of international trade and the increasing number of entities operating internationally,
understanding international taxation has become essential for companies and individuals
wishing to optimize their tax obligations while remaining compliant with different legal systems.

International taxation refers to the set of laws and regulations that determine how taxes are
applied to international income. It concerns multinational companies, individuals working
abroad, and encompasses a variety of taxes. International taxation is a complex field, influenced
by bilateral treaties, double taxation avoidance strategies and various regulations designed to
counter tax evasion.

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Why is international taxation important?
Understanding international taxation is crucial to avoiding the potential pitfalls of double
taxation, and to legally exploiting the advantages offered by differences between national tax
systems.

Tax Principles
There are two main philosophies of taxation that influence how countries tax income:
1. Territorial Principle: This means that a country only taxes income earned within its borders.
If a company earns money abroad, that income isn’t taxed by the home country. This
approach encourages businesses to expand internationally without facing extra tax burdens.
2. Worldwide Principle: In contrast, this principle allows a country to tax its residents or
companies on all their income, regardless of where it’s earned.
This can lead to double taxation because the income is taxed
both in the country where it was earned and again by the home
country.

EXAMPLE: Let's say Global Tech Corp, a technology company

based in Germany, has expanded its operations and opened a
subsidiary in India. The subsidiary, Tech India, generates significant
revenue from its operations in the Indian market.

Taxation in Germany (Worldwide Taxation): As a German

corporation, Global Tech Corp is subject to German corporate taxes
on its worldwide income. This means that any profits earned by its
subsidiary in India are also taxable in Germany when they are
reported on the parent company’s consolidated financial statements.

Taxation in India (Territorial Taxation): The subsidiary, Tech India, is required to pay Indian
corporate taxes on its profits generated within India. Let’s say it earns 50 million (Indian Rupees)
in profits, and the corporate tax rate in India is 25%. Therefore, Tech India would owe 12.5
million in taxes to the Indian government.

Tax Rate in Different Countries: There’s also significant variation in the actual tax rates that
companies pay across different countries.

Example of how different countries tax Corporation: Apple Inc.

Apple, a U.S.-based company, pays a 21% corporate tax on its global income. Post-2017
reforms, foreign income is taxed under the GILTI provision at a reduced rate. In Ireland, where
its European HQ is based, Apple benefits from a lower 12.5% corporate tax rate. Though the
"Double Irish" strategy ended in 2020, this lower rate remains advantageous. In China, Apple
pays 25% corporate tax on local profits, benefiting from low production costs and favorable tax

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policies. Through the Netherlands, Apple reduces taxes on royalties via a 10% tax rate on
intellectual property profits. In the UK, Apple is subject to a 25% corporate tax rate and a 2%
Digital Services Tax (DST) on digital revenue but routes some profits through Ireland to reduce
its tax burden.

Tax Minimization Strategies

1. Tax treaties: Tax treaties are agreements between two countries that outline how they will
tax income earned across borders. These treaties are essential to avoid double taxation
and to encourage cross-border business.

How Tax Treaties Work

● The Philippines has tax treaties with several countries, including Japan, China, the
U.S., and Vietnam. Let’s see how these treaties help:
● Example: A Filipino Freelancer Providing Services to the U.S. Client. Let’s say Ana, a
Filipino freelance web developer, provides services to a client based in the United
States.

U.S. Taxes: The U.S. may require withholding taxes on the payment Ana receives, since the
service is being provided to a U.S.-based client. This could be as high as 30%.
Philippines (Worldwide Taxation): Ana, being a resident citizen of the Philippines, must report
and pay taxes on her global income in the Philippines, including what she earns from the U.S.

Philippines-U.S. Tax Treaty: Fortunately, the Philippines and the U.S. have a tax treaty that
reduces the withholding tax on services to, say, 15% instead of 30%.

Tax Haven: A tax haven is a country or jurisdiction that offers minimal or no tax liability to
individuals and businesses. These places often have low or zero tax rates, and they provide a
high degree of privacy for those who set up accounts or corporations there. Tax havens are
used by individuals and corporations to reduce their overall tax burden, sometimes legally,
sometimes through tax avoidance strategies.

Characteristics of Tax Havens:

● Low or Zero Tax Rates: Tax havens typically have very low income tax rates or no income
tax at all.
● Secrecy and Confidentiality: Many tax havens offer strict confidentiality laws that protect the
identities of account holders and business owners.
● Lack of Transparency: Tax havens often have minimal reporting requirements, which can
make it difficult for tax authorities in other countries to track financial activities.
● Flexible Corporate Structures: Tax havens usually allow for various types of corporate
structures, making it easy for businesses to establish and maintain operations.
● Examples: Cayman Island, Bermuda, Luxembourg, Panama, Monaco

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However, the use of tax havens can be legal, it often raises ethical questions and can lead to
public outcry, particularly when large corporations and wealthy individuals shift profits to avoid
paying taxes in their home countries.

The Foreign Tax Credit (FTC) Is a provision that allows taxpayers to reduce their tax liability in
their home country for taxes paid to foreign governments on income earned abroad. This credit
helps mitigate the problem of double taxation, where individuals and businesses could be taxed
on the same income by both their home country and the foreign country where the income is
generated.

Why Do We Need the Foreign Tax Credit?

When a Filipino citizen or business earns income in another country, that country usually
imposes taxes on that income. However, as a resident of the Philippines, that individual must
also report their worldwide income to the Philippine government and pay taxes on it. The FTC
helps prevent the taxpayer from paying taxes twice on the same income.

Example: Jollibee Foods Corporation: Jollibee Foods Corporation (JFC) expanded to Vietnam,
where it earned ₱1,000,000 in 2023 and paid ₱200,000 in taxes (20% corporate income tax). As
a Philippine company, Jollibee must report its global income to the Philippine Bureau of Internal
Revenue (BIR), with a tax liability of ₱300,000. To avoid double taxation, Jollibee can claim a
Foreign Tax Credit (FTC), deducting the ₱200,000 paid in Vietnam from its Philippine tax. This
reduces its final tax obligation in the Philippines to ₱100,000

Benefits of this Strategies

● Avoidance of Double Taxation: These three mechanisms are designed to ensure that
taxpayers don’t face taxation on the same income in different countries, fostering fairness in
the tax system and lowering the overall tax burden.
● Support for International Business: Each of these tools promotes cross-border trade and
investment, encouraging companies to grow globally by establishing a more favorable tax
landscape.
● Improvement of Tax Management: They offer taxpayers ways to effectively handle and
streamline their tax responsibilities, improving cash flow and enabling better financial
planning and investment opportunities
Challenges in International Taxation
● Complexity of Tax Laws: Varying tax laws across jurisdictions can complicate compliance
for businesses and individuals operating internationally.
● Tax Avoidance and Evasion: Multinational companies often engage in tax planning
strategies that exploit loopholes, leading to significant revenue losses for governments.
● Regulatory Disparities: Different approaches to taxation can create unfair advantages for
companies in lower-tax jurisdictions, distorting competition.
● Technological Advancements: The rapid growth of digital businesses poses challenges for
existing tax frameworks, necessitating new approaches to taxation.

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Future Trends in International Taxation
1. Increased Cooperation: Countries are likely to continue collaborating through international
organizations to create harmonized tax rules and reduce tax avoidance.
2. Emphasis on Transparency: Governments are focusing on increasing transparency in
international transactions to combat tax evasion and improve compliance.
3. Digital Taxation Frameworks: Expect further development of specific tax rules for digital
businesses, as nations seek fair tax treatment for all companies regardless of their business
models.
4. Sustainability and Taxation: There is a growing trend to align tax policies with
sustainability goals, potentially introducing tax incentives for environmentally friendly
practices.
Taxation on Domestic Side (Philippines)
The Philippine tax system is governed by the National Internal Revenue Code, which outlines
various taxes imposed by the national and local governments. The Bureau of Internal Revenue
is the primary agency responsible for tax collection and enforcement.
Key Types of Taxes
● Income Tax
Individual Income Tax
Corporate Income Tax
● Value Added Tax (VAT)
● Excise Tax
● Property Tax
● Capital Gains Tax

Recent Tax Reforms

The Philippines has undergone significant tax reforms in recent years:
● TRAIN Law (2017): This landmark legislation aimed to simplify the tax system, increase tax
revenue, and provide relief to low-income earners. It also included higher excise taxes on
fuel and sugary beverages.
● Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act (2021): This law
reduced the corporate income tax rate and provided incentives for businesses affected by
the COVID-19 pandemic.

Challenges in Taxation
Despite reforms, the Philippine tax system faces several challenges:
1. Tax Compliance: The informal sector's size and low compliance rates hinder revenue
collection. Many individuals and businesses do not pay taxes, leading to a significant tax
gap.
2. Corruption: Issues of corruption within the BIR and local government units can undermine
public trust and compliance.
3. Complexity: The tax system can be complex, leading to confusion and difficulty in
compliance, particularly for small businesses.

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4. Economic Disparities: Regional disparities affect tax collection and enforcement, with
wealthier areas generating more revenue than poorer regions.

Comparative Analysis of Taxation in the Philippines vs. International Taxation:

In relation to; multinational corporations, individual taxes, and their compliances and challenges.

Aspect Philippines International

Corporate 25% (20% for small businesses) Typically ranges from 15% to 30%, with many
Income Tax Rate countries offering incentives for specific
industries.

Withholding Tax 15% on dividends, 20% on Generally between 0% and 30%, varying based
Rates interest and royalties on tax treaties; many countries offer reduced
rates for treaty partners

Transfer Pricing Enforced based on arm’s length Common globally; OECD guidelines widely
Regulation principle; detailed followed, with varying levels of enforcement
documentation required and complexity.

Tax Incentives for Investment tax credits, Many countries offer incentives such as
Investments preferential rates in specific reduced tax rates, tax holidays, or credits to
sectors (e.g., renewable attract FDI.
energy)

Double Taxation Over 40 treaties to prevent Most countries have DTAs, facilitating tax relief
Agreements double taxation for multinational firms; the number of treaties
(DTAs) varies significantly

Value Added Tax 12% standard rate Ranges from 0% to 27%; many countries utilize
(VAT) VAT/GST as a significant revenue source,
typically around 15%.

Compliance and BIR oversees tax collection; Compliance varies; some jurisdictions have
Administration compliance can be complex due streamlined processes while others can be
to bureaucracy and corruption burdensome. Many countries use digital
issues solutions for tax administration.

Capital Gains Tax 6% on the sale of real estate; Rates vary widely; some countries have no
different rules for other assets capital gains tax while others can tax gains at
regular income rates.

Tax Appeals and Taxpayers can appeal decisions Many countries have structured processes for
Disputes through administrative and tax disputes; resolution timelines vary widely
judicial processes; can be
lengthy

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Auditing in International Environment

Auditing is the process by which specialized accounting professionals, known as auditors,

examine and verify a company's financial systems, control measures, and financial records. It
plays a crucial role in financial markets by ensuring that a company’s financial statements are
accurate and reliable, allowing investors to make informed decisions.

The primary goal is to provide an independent opinion on whether the financial statements are
free of material misstatement due to error or fraud.

Challenges in Cross-Border Auditing: Auditing standards and practices vary from country to
country, posing challenges for multinational corporations (MNCs) and global investors. Different
countries have distinct accounting and auditing regulations, and the training, qualifications, and
status of auditors vary. Investors face greater uncertainty when comparing financial statements
across borders, since they must trust that the auditing procedures used in foreign countries
meet certain standards of reliability.

Multinational Approaches to Auditing: To maintain high audit quality across borders,

multinational corporations typically use a global auditing firm (such as Ernst & Young, Deloitte,
KPMG, or PwC) to audit their consolidated financial statements. For example, Coca-Cola's
consolidated financial statements are audited by Ernst & Young. The firm ensures that
subsidiaries in various countries are audited either by their own international branches or by
reputable local auditors whose work is reviewed to meet international standards, such as the
U.S. Generally Accepted Auditing Standards (GAAS). This ensures a level of consistency and
reliability in financial reporting across borders.

International Harmonization Efforts

Several international organizations are working to harmonize auditing standards worldwide:

● International Federation of Accountants (IFAC): IFAC publishes International Standards

on Auditing (ISA), which aim to standardize auditing practices globally. These standards are
essential for the consistent auditing of financial statements across different countries.
● International Organization of Securities Commissions (IOSCO): IOSCO collaborates
with IFAC to promote high-quality auditing standards, recognizing their importance in
maintaining trust and transparency in global securities markets.
● European Union (EU): The Eighth Directive of the European Union sets qualification and
educational standards for auditors, ensuring that auditors meet consistent educational and
professional requirements across EU member states.

Educational Standardization: In addition to auditing standards, IFAC promotes the global

standardization of accounting education through International Education Standards. These
standards ensure that accountants worldwide receive consistent training, establishing a
foundation for reliable and high-quality audits.

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 International Auditing vs. Domestic Auditing (Philippines)

International Domestic ( Philippines)

Scope and Reach: Involves auditing multinational companies Focuses on auditing companies operating
that operate in multiple countries. within the Philippines.

Standards and Auditors use various standards depending Auditors in the Philippines use the
Regulations: on where the company operates. The Philippine Standards on Auditing (PSA),
most common are the International which are largely based on ISA but adapted
Standards on Auditing (ISA). to the local business and regulatory
environment. Auditors must also comply with
rules set by local agencies like the
Securities and Exchange Commission
(SEC) and the Bureau of Internal Revenue
(BIR).

Challenges: Deals with complexities like: The main challenges are adhering to local
- Varying auditing standards across regulations and addressing issues specific to
countries. the Philippine business environment, such
- Different laws and regulations in each as changes in tax laws, financial reporting
jurisdiction. regulations, and compliance with local
- Currency exchange rates and government rules.
financial reporting in multiple
currencies.
- Language barriers and cultural
differences in business practices.

Auditor Auditors need a broad understanding of Auditors must be Certified Public

Qualifications: international accounting standards (ISA, Accountants (CPAs) licensed in the
GAAS), as well as the ability to navigate Philippines, with knowledge of local laws,
different regulatory environments. Often, PSA, and tax regulations. They may work for
global firms like Ernst & Young, Deloitte, both local firms and multinational companies
PwC, or KPMG handle these audits due to but focus on the Philippine market.
their global presence.

Coordination and Requires greater coordination between Communication and coordination are more
Communication: auditors in different countries. For straightforward, as the audit is confined to
example, a multinational may have its local operations within the Philippines, using
headquarters audited in one country, while a single set of national standards.
its subsidiaries are audited by local firms
in other countries. The central auditing
firm must ensure consistency in audit
quality across all locations.

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International Financial Statement Analysis

Analyzing financial statements from different countries presents various challenges, as

companies may follow different accounting standards, languages, and formats.

Key Challenges in International Financial Statement Analysis:

● Different Accounting Standards: The United States uses Generally Accepted

Accounting Principles (GAAP). Many other countries follow the International Financial
Reporting Standards (IFRS).
● Language Differences: While this is an obvious barrier (e.g., reading a financial statement
in Spanish for a Mexican company), even countries speaking the same language, like the
U.S. and U.K., can have subtle language differences. For example, “turnover” in the U.K.
refers to what is called “revenue” in the U.S.
● Format Differences: Financial statement formats differ by country. The layout of income
statements, balance sheets, and notes to the financial statements can vary, making
cross-country comparison difficult.

Overcoming Challenges:

● Standardization: Multinational companies and investors rely on IFRS to standardize

accounting practices globally, making it easier to compare financial data.
● Translation and Currency Conversion: Translating financial documents and converting
currencies are common tasks in international financial statement analysis. Online tools
and professional services often assist in overcoming these barriers.

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