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

Which of the following is the most likely reason a host government would impose restrictions on remittance of dividends by a multinational's subsidiary?

Governments restrict dividend remittances mainly to conserve scarce foreign currency reserves and protect the balance of payments. Such controls limit outflows of hard currency, and multinationals respond by using other routes such as royalties, management charges, loans or transfer pricing, where permitted.

  1. ATo conserve scarce foreign currency reserves and protect the balance of paymentsCorrect
  2. BTo raise the subsidiary's credit rating with foreign lenders
  3. CTo reduce the subsidiary's local taxable profits
  4. DTo encourage the parent to use transfer pricing more aggressively

Explanation

Remittance controls are typically introduced when a country has limited foreign currency reserves or balance of payments pressure. Controls do not improve the subsidiary's rating or reduce taxable profits. They may, however, encourage alternative extraction methods, but that is a consequence, not the reason.

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