Corporate Risk Management & Multinational Tax Management

Shifts in foreign exchange rates have the potential to undermine the competitive position of the firm and destroy profits. It is necessary for managers to be aware of the consequences of currency risk, not only because it influence economic growth, financial influence such as income to be received from abroad and competitiveness but also firm's survival.

There ate three types of exposure for firms that operate in an international market: transaction, translation and economic exposure. Transaction exposure is for the enterprise tends to have commitment in a foreign currency both receiving and paying. This type of risk is usually associated with imports and exports.Translation risk arises because financial data denominated in one currency are then expressed in terms of another currency. A company's economic value may decline as a result of forex movements causing a loss in competitive strength.

Ingredion Inc, starch and sweetener maker, the earning of current quarter were declined 20 cents a share. According to Cheryl Beebe, the CFO of the company, the weakness of Brazilian real, Argentine peso, British pound and euro is the main reason. There are might be more 7cents reduction according to Beebe's expects which with the real accounting for about half of the total. The currency risk of Ingredion Inc is transaction risk. There are some of strategies of reduce the risk, such as invoice the customer in the home currency, netting or do nothing. However, Ingredion Inc not expect to change their hedging strategy significantly. When managers choose this strategy usually because of the worry about the gap between net cash flow and hedging. Besides that, hedging would influence shareholders attitude about foreign gains or loss. That, so some extent, would impact the future foreign acquisition and exploitation.

The explanation of  this strategy is because of the main hedge of Ingredion Inc are using for ensure any dollar-denominated transactions between its U.S. operations and foreign units, like royalty or dividend payments. "You have to be very, very careful, it's expensive to hedge."says Ms. Beebe.  Many firms adopt this policy by taking "win some, lose some" principle. Choosing increase the hedge strategy for against currency risk might help or hurt the values of foreign sales and earnings when translated into dollars. Critics of hedging currency risk often cite companies which have come a cropper from dabbling in derivatives.

As far as I am concerned, for multinational enterprises, the changeable currency of different countries would have much more influence on their balance sheet. However, to choose which strategy to against the risk is simple due to the how worried need to about the forex transactions. If $1m is a large part of   subsidiaries turnover which may be a quater of total revenue, then the forex risk is need to be considered. If $1m is small part of the annual turnover and is much less than profit, then may be the managers should save hedging cost. Do nothing is main due to different enterprises, there are not rules or regulars for the judgement.

When discuss about multinational tax management, i take Google as an example. It is reported that Google managed to avoid $2 billion in worldwide income taxes within 2012. They accomplished it by shifting about $9.8 million turnover to Bermuda shell company simple because there are no income corporate tax. A lot of companies make strategy of transfer pricing to overseas subsidiaries which located in none income tax area such like Bermuda, HongKong, Dublin. 

Transfer pricing is more often strategy by big multinational corporate which own overseas subsidiaries. Managers tends to ovoid the income taxes to income tax free area. However, this is coming under pressure around the world. More and more governments such like UK, France, Italy, Australia  are put more efforts in investigate if multinational corporate due more money to abroad.

Certainly, managers utilize the currency differentiation between headquarter and subsidiaries for avoid tax and achieve cost control. The tax which ought to be paid or not is not only an ethic issues of business environment, but also important strategy of managers. It is only theorical that this issue would be solved as ideal model, most of the companies would still transfer globally for creating and protect shareholder value.