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

A multinational parent receives dividends from a subsidiary in a country that imposes exchange controls limiting the amount of profit that may be remitted each year. Which approach would the parent most appropriately use to extract value from the subsidiary without breaching the controls?

The parent should use alternative permitted channels such as management fees, royalties or intra-group loan interest, where legally allowed and commercially justified. These move value out lawfully, whereas accounting changes do not move cash and unofficial remittance breaches the exchange controls.

  1. ACharge the subsidiary management fees, royalties or interest on intra-group loans, where these are permitted and justifiableCorrect
  2. BReduce the subsidiary's reported profit by increasing its depreciation rate
  3. CInstruct the subsidiary to hold all cash in local currency indefinitely
  4. DDeclare a dividend larger than the permitted limit and remit it through an unofficial channel

Explanation

Management fees, royalties and loan interest are alternative legitimate routes for extracting cash, provided they are permitted by local rules and supported by commercial substance. Changing depreciation does not move cash, holding cash does not repatriate it, and unofficial remittance is illegal and unethical.

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