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ACCA Strategic Professional · Advanced Financial Management · Dividend policy in multinationals and transfer pricing

A multinational parent has a subsidiary in a country that imposes exchange controls limiting dividend remittances. Which of the following methods would a parent most typically use to extract cash from the subsidiary in a way that may circumvent a dividend cap?

Charging royalties and management fees is the typical way to extract cash when dividends are capped. These payments are treated as expenses, not distributions, so they may fall outside the dividend restriction, though tax authorities may still scrutinise them.

  1. ACharging royalties and management fees to the subsidiaryCorrect
  2. BIssuing new equity in the subsidiary to local investors
  3. CReducing the subsidiary's inventory levels
  4. DIncreasing the subsidiary's local borrowing

Explanation

Royalties, management fees, transfer prices and intra-group loan interest are alternative remittance routes that are often not subject to the same cap as dividends. Issuing equity to locals brings cash in rather than moving it to the parent. Inventory and local borrowing do not move cash to the parent.

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