Page 73 - FINAL CFA II SLIDES JUNE 2019 DAY 5.2

LOS 16.h: Describe how multinational operations
affect a company’s effective tax rate. READING 16: MULTINATIONAL OPERATIONS

MODULE 16.8: TAX, SALES GROWTH, FINANCIAL RESULTS
Tax Implications of Multinational Operations
Multinational corporations are subject to multiple tax jurisdictions with differing laws and tax rates. In the United States, for example, the tax code allows a
credit for foreign taxes paid by U.S. companies, effectively taxing the company at the U.S. tax rate.

Effective tax rate is the tax expense in the income statement divided by pretax profit.

Statutory tax rate is provided by the tax code of the home country. Accounting standards require companies to provide a reconciliation between the
effective tax rate and the statutory tax rate. This reconciliation disclosure can be used by the analyst to project future tax expense.
Changes in effective tax rate on account of foreign operations can be due to:
• Changes in the mix of profits from different countries (with varying tax rates).
• Changes in the tax rates.

Answer:

1. The effect of foreign operations resulted in an
increase in effective tax rate for Amco by 3.4% and a
decrease for Bianco by 1.2%. Hence, Bianco
benefited from its foreign operations in reducing its
effective tax rate and tax expense.

2. If the mix of foreign operations increases, assuming
no change to the tax rate, Bianco would see its
effective tax rate decrease further and Amco would
see its effective tax rate increase.