Tax Differences Between Equity Financing And Debt Financing Of Multinational Corporations

The financing strategy of multinational enterprise group is an important part of financial strategy.

There are many ways of financing pnational corporations. They can adopt pnational equity financing, pnational debt financing, pnational leasing financing and pnational project financing.

There are tax differences between different financing channels and ways. Therefore, the group must weigh the financing costs and financing risks, make a comprehensive analysis of the tax effects of various sources and financing methods, so as to realize the scientific and rational combination and selection of group funds and strive to achieve the best capital structure.

Establishing a global target capital structure is a common practice in the fund-raising activities of pnational corporations, that is, the capital structure that minimized its weighted average capital cost in the global business scope, thus maximising the value of the group.

The weighted average cost of capital model is expressed as follows: (see Annex)

Among them, D is the amount of liabilities; E is equity capital; t is the corporate income tax rate; Ke is the cost of equity financing; Kd is the pretax debt cost.

The sum of debt cost and equity cost is total capital cost.

The cost of capital for a multinational enterprise group may be different from that of a domestic company.

Multinational companies that often borrow heavily may get preferential treatment from creditors, thereby reducing capital costs, and issuing large amounts of stocks and bonds will also reduce the issue cost.

In addition, if the market interest rate of the country where the subsidiary is located is relatively low, it will get lower cost capital.

Moreover, the use of foreign capital does not necessarily increase the number of multinational enterprises.

As long as the income created by the subsidiary is as much as possible in the same currency as the loan.

Because each country's economy is independent of each other, the net cash flow from different subsidiaries will show a smaller change value, which will reduce the probability of bankruptcy and reduce capital costs.

The financing strategy of pnational enterprise group is not only influenced by the tax collection policy of parent company or subsidiary, but also influenced by other factors, such as withholding tax on dividends and interest, bilateral or multilateral international tax treaties and the method of international duplication of taxation by the country of residence.

The choice of financing mode of pnational enterprise group also affects the taxable income of the company.

The best capital structure of a multinational enterprise group is based on the capital structure of all the subsidiaries and parent companies in the world. Therefore, the capital structure of the company should be based on the optimal capital structure of the company, and the corresponding measures should be taken to monitor and adjust the overall debt ratio of the company.

The capital structure of each subsidiary can be consistent with the capital structure of the parent company or with the capital structure of the local enterprises. The general principle is: reducing the financing cost and financing risk, so that the overall capital structure of the group is the best.

Internationally, if yes

The withholding tax is levied, but the international tax treaties between the two countries can be used to lower the taxable tax rate, but not to be redeemed in the country of residence, which will lead to double taxation internationally.

And the way of borrowing capital will not cause repetitive taxation.

The interest paid by the paying party to non resident payers in many countries should be included in personal income to pay personal income tax, but the tax rate should be lower than the tax rate or tax exemption for the profit distribution.

Some countries reduce the double taxation through profits tax and corporate tax, or tax allocation for specific income.

Owing to the fact that taxes can not be fully credited, loan financing will be profitable.

The capital structure of a multinational enterprise group is divided into the total capital structure and the subsidiary capital structure.

Generally speaking, the financial situation of any overseas subsidiary will affect the overall level of its company in varying degrees.

And the capital structure strategy determined by the parent company affects the capital structure of the subsidiary.

In fact, the ratio of debt to equity capital of multinational corporations is not fixed. There is a big difference in the overall capital structure of multinational enterprises in different countries and different industries.

A survey conducted by foreign scholars found that the capital structure of multinational corporations tends to change according to the country where the company headquarters are located, and the debt ratio of the overall capital structure of multinational enterprises is higher than that of domestic enterprises.