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ACCA Strategic Professional · Advanced Financial Management · Management of international trade and finance

A multinational has a subsidiary in a country with strict exchange controls limiting dividend remittances. Which strategy is most likely to allow the group to extract cash while remaining within the controls?

Charging genuine management fees and royalties at arm's length is the best route. These are payments for services or rights rather than dividends, so they may bypass remittance limits and give local tax relief, whereas retaining profit or cutting interest keeps cash trapped.

  1. ACharging the subsidiary management fees and royalties for genuine services and licences, within arm's length limitsCorrect
  2. BRaising the subsidiary's transfer prices on inputs it sells to group companies
  3. CReducing the loan interest paid by the subsidiary to the parent to zero
  4. DRetaining all profits in the subsidiary to build up cash reserves

Explanation

Fees and royalties are payments for services or rights, often treated differently from dividends under controls and deductible locally. They must be arm's length to avoid tax challenge. Raising transfer prices on the subsidiary's own sales would bring cash in rather than extract it. Cutting interest or retaining profit leaves cash trapped.

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