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ACCA Strategic Professional · Advanced Financial Management · The role of the treasury function in multinationals

A multinational wishes to extract cash from a subsidiary in a country with strict dividend limits but which allows interest on intra-group loans as a tax-deductible expense. Which approach is most likely to extract cash while also reducing the subsidiary's local tax charge?

Using an intra-group loan instead of equity best achieves both aims. Interest is tax deductible in the subsidiary's country, lowering local tax, and interest and capital repayments are remitted outside dividend restrictions. Dividends are not deductible, and lower royalties or export prices would reduce the cash extracted.

  1. APay a higher dividend funded by new equity from the parent
  2. BReplace part of the parent's equity funding with an intra-group loan, repaying interest and principalCorrect
  3. CReduce the transfer prices charged by the subsidiary on exports to the group
  4. DLower the royalty rate charged to the subsidiary to zero

Explanation

Interest on intra-group loans is deductible locally, so the subsidiary's taxable profit falls, while interest and principal repayments are remitted outside dividend limits. Dividends are not deductible. Lowering export transfer prices or royalties would reduce cash or profit extracted, not increase it, subject to thin capitalisation rules.

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