International Financial Management Arbitrage

Question: Discuss about theInternational Financial Managementfor Arbitrage. Answer: Discussion of the Arbitrage Arbitrage is a popular term in the share market and the arbitrager is a significant intermediary that assists in the mechanism that concentrates on the discovery of price in different markets that includes the equity, foreign exchange or else the derivatives (Lastra 2015). As rightly put forward by Frank and Pamela (2016), the arbitrage refers to the simultaneous purchase as well as sale of a particular asset from different platforms and making profit from the variation in the price of the particular assets. However, it can be regarded as a way of earning sure profits without investing any money and assuming no risk (Wild et al. 2014). Therefore, from the perspective of both economics and finance, arbitrage is essentially the practice of taking benefit of a price variation between two or else morebusiness markets. This also requires striking an amalgamation of corresponding deals that capitalize upon different types of imbalance, where profit is considered as the difference between d ifferentmarket prices (Brooke 2016). The tax arbitrage refers to the practice of making profits from the variations in the tax transactions for different tax purposes (Harrison et al. 2014). Again, the intricacies of different tax codes often permits for many incentives that drive individuals to restructure different transactions in the most beneficial manner to pay the least amount of tax. Therefore, Tax arbitragecan be regarded as an action that essentially makes profit out of the differences in the way income or else the capital gains of different business entities are taxed. Again, the tax shelters can also be used to acquire advantage ofdifferent tax arbitragechances (Brigham and Daves 2012). For instance, an individual or else a business unit mightcarry out business operation in a particular nation or else form a definite legal framework so as to ensure that the incomeearned out of the investments can be taxed at a comparatively desirable tax rate (Titman and Martin 2014).However, there is a very narrow line of di fference between the tax avoidance and the matter of tax evasion. There are also certain types of tax arbitrage that are essentially illegal (Brigham and Ehrhardt 2013). As per the present case study, Apple, worlds one of the largest corporationa was charged with huge bill after the European Commission directed that the tax agreement between Apple as well as the Irish Tax authorities amounted to illegal condition (Bloomberg.com 2016). However, as per the case study, the deal also permitted Apple to make the maximum rate of tax of around 1% and during the year 2014, the firm just made payments of roughly 0.005% although the general rate of corporation tax in Ireland is around 12.5%. Again, the member states cannot provide tax benefits to selected corporations. However, the members can provide tax benefits to different selected corporations and this is considered illegal as per the EU State Aid Directives. Apple as well as Ireland wanted to appeal against the directive (Investmentz.co .in 2016). Opinion Regarding the Engagement of Apple in the Practice of Tax Arbitrage The management of Apple engages in the practice of tax arbitrage by desperately making efforts to evade the corporate income tax of the U.S that essentially has statutory corporate tax rate equal to 35 percent. The US tax rate is measured to be the highest in the entire business world (Farrell and McDonald 2016). The regulators of the EU regulators mentioned that the business entity Apple achieved tax savings to a great extent in the nation Ireland through official rulings that officially allowed two dissimilar subsidiaries of the corporation Apple together with the Apple Sales International, to share out the gained profit to definite head offices that had existence only on paper and would have failed to generate such amounts of profits (Farrell and McDonald 2016). Thereafter the commission affirmed that Ireland presented Apple with a particular selective tax treatment that permitted Apple to avoid the countrys effective tax rate of 12.5% and endorsed the corporation an unjust benefi t over diverse other business units for several number of years. Thus, the company Apple engaged in the tax arbitrage and enjoyed unjust advantage. Opinion Regarding the Fairness of EU Towards Apple As per the reports, the EU states that the effective tax rate of 0.005% is applicable to the overall profits of Apple Sales International, that is the Irish unit that according to the regulators is accountable for purchasing Apple products from different equipment manufacturers from different parts of the world as well as for selling the products in various parts of Europe, the Middle East, Africa as well as in India.Again, the commission also mentioned about an additional unit, Apple Operations Europe that is in charge for manufacturing definite lines of products such as computers for the entire Apple group. The management of Apple has stated that it has paid $400 million in taxes in Ireland in 2014, that is significantly more than what the figure provided by the commission figure suggests. In addition to this, the Senate Permanent Subcommittee on Investigations divulged the factthat a particular Apple subsidiary in Ireland made payments of around just $10 million as taxes during th e period 2011 for the $22 billion in earnings, as per the effective tax rate of roughly 0.05%. This is similar to making payments of $500 in tax on the overall income of $1 million (Bloomberg.com 2016). However, according to the report presented by the subcommittee enumerations were mainly founded on different non-public information to which the management of Apple have responded as per the definite questions. Therefore, it is apparent that Apple runs through effective tax evasion. The company Apple desperately makes efforts to evade the corporate income tax of the U.S that essentially has an apex statutory rate that is equal to 35 percent (Farrell and McDonald 2016). The US tax rate is considered to be the highest in the business world. Particulars that the corporation has released in different public filings reflect the fact that the foreign profits of Apple are taxed at a particular rate considerably lower than even the tax rate of Ireland that is equal to 12.5%. During the year 2014, reports revealed the effective foreign tax rate to be 6.4 percent. Consequently, the regulators of the EU regulators stated that the company attained its tax savings to a large extent in Ireland by way of official rulings that permitted two different subsidiaries of the company Apple counting Apple Sales International, to apportion the earned profit to head offices that existed only on paper and could not have generated such profits. The commission declared that Ireland offered Apple selective tax treatment that permitted the iPhone manufacturer evade the countrys 12.5% effective tax rate and allowed the company an unjust advantage over erstwhile corporations for a number of years. Thus, it can be regarded as a violation of the state-aid directives of the EU. However, on the other hand, it can be said that the EU is also interfering into the tax policy of Ireland and by letting Apple pay less than the 12.5% tax; Ireland is providing state aid to the company (Farrell and McDona ld 2016). Summary Regarding the Person that Receives the Money Tax rates are set by individual EU members, not by the European Commission.Therefore, as per the official rulings the Irish government would have revoke the previous agreement of tax cut with the Apple and take out the tax amounting to 13bn (Farrell and McDonald 2016). Influence on the View Towards Apple from the Perspective of an Investor The Commission's case is not about how much Apple pays in taxes, it's about which government collects the money. As mentioned in the case study, the tax ruling is said to have a profound and at the same time harmful impact on investment as well as job creation in the entire Europe. The upshot of the new tax ruling is anticipated to be intensely troubling and might adversely affect the overall cross-border investment between the nations that is the United States and all other EU Member Nations (Farrell and McDonald 2016). The European agency undertaking the entire investigation has divulged as per evidence that the tax bill during the period 2014 that amounted to roughly 0.005% of the profit figure of Apple's is about $50 for taxes for the profit generation of every $1 million. However, as per the effective tax rate of Ireland that is equal to 12.5 percent, Apple needs to make payments amounting to $125,000 per million (Bloomberg.com 2016). Nevertheless, as mentioned in the case study , a particular to investors, presented by Gene Munster, analyst at Piper Jaffray mentioned that the tax bill of 13bn was not a big transaction for a giant company like Apple.Though in absolute terms the penalty is hefty, the definite tax bill replicates a very small portion of the valuation of the firm. Therefore, the share prices of Apple are expected to remain stable (Griffin and Pustay 2012). Impact of this Ruling on the Foreign Direct Investment into Ireland and the Wider European Union As per the case study, it can be hereby ascertained that the tax ruling is said to have a intense and simultaneously harmful influence on the overall investment as well as employment landscape of the entire Europe. The results of the new tax ruling declared by the EU is anticipated to be extremely troubling and might possible adversely influence the overall overseas investment between the nations that is the United States and different EU Member Nations (Sharan 2012). The management of Apple has cautioned that the new tax rulings of EU might affect the overall future investments in the entire Europe after the issuance of the notification that ordered the company to make payments of 13 bn in back taxes or penalty to Ireland (Farrell and McDonald 2016). However, this fuming response of the Apple as well as from the respective authorities of the EU nation is most likely to ignite a fresh political disagreement and row between both the US and the EU (Madura 2011). The current ruling also threatened to harm the important spirit of economic partnership between the US and the EU. In addition to this, the Treasury Dept. also notified the actions of the EU lacked parity and further claimed that the EU unjustly targeted American corporations and pursued a legal stratagem that was essentially not in agreement with the "well-established international tax standards."Therefore, it would affect the overall job and at the same time wealth creation of the Ireland as well as the wider European Union (Bloomberg.com 2016). References Bloomberg.com. 2016.Bloomberg.com. [online] Available at: https://www.bloomberg.com [Accessed 14 Oct. 2016]. Brigham, E.F. and Daves, P.R., 2012.Intermediate financial management. Nelson Education. Brigham, E.F. and Ehrhardt, M.C., 2013.Financial management: Theory practice. Cengage Learning. Brooke, M.Z., 2016.Handbook of international financial management. Springer. Farrell, S. and McDonald, H. 2016.Apple ordered to pay up to 13bn after EU rules Ireland broke state aid laws. [online] the Guardian. 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