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This chapter discusses the management of short-term assets and liabilities within a multinational corporation. The assets consist of cash, marketable securities, inventories, and accounts receivable. The liabilities consist of short-term debt and accounts payable. We begin by discussing net working capital, an investment that a firm must manage well to ensure its future profitability. The next topic is international cash management, which is followed by a discussion about how foreign affiliates transfer funds to their parent corporations.
When related affiliates buy goods and services from each other, the prices charged are called transfer prices. The chapter explores how different transfer pricing policies can shift a firm's income and income tax burdens around the world and how governments attempt to regulate these shifts. The effect of transfer pricing policies on managerial incentives is also considered. Governments watch transfer prices very closely as large tax payments can be shifted across jurisdictions. For example, in September 2006, GlaxoSmithKline (GSK), the UK headquartered global pharmaceutical firm, agreed to settle a transfer pricing dispute with the US Internal Revenue Service (IRS) by paying $3.1 billion in back taxes, interest and fines. The IRS argued that GSK charged its American subsidiary too much for Zantac, the blockbuster ulcer treatment drug, resulting in lower profitability for the American subsidiary and lower taxes for the IRS. Sometimes countries impose currency controls making it difficult if not impossible to repartriate currency, a situation known as blocked funds. The chapter examines techniques for mitigating problems associated with blocked funds. Unfortunately, sometimes nothing can be done, and the multinational corporation must simply write off the loss. For example, in 2016 American Airlines Group announced that it had written off more than half a billion dollars in revenue stuck in Venezuela because of currency controls. The South American country's socialist government had compelled all air carriers to sell tickets denominated in Venezuelan bolivars but made reconverting those sales into US dollars difficult if not impossible. Rampant inflation and depreciation of the bolivar subsequently caused substantive losses in value, prompting the write-off. Globally, in 2016 the International Air Transport Association estimated that $3.7 billion of airline cash was trapped in Venezuela as a result of its 12-year-old currency control system.
The last part of the chapter discusses the management of a firm's accounts receivable and its inventories in an international environment.
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