Dividend Policy in Multinationals and Transfer Pricing

Dividend Policy in
Multinationals and Transfer

Pricing
Reported by: Meynardo Talens Jr

Dividend Capacity
Dividend capacity is the cash available for
shareholders or the “free cash flow to equity”. It is the
cash available for payment to shareholders after
providing for capital expenditures to maintain existing
assets and to create assets for future growth.
For multinational companies, the capacity would

depend on its after-tax profits, investment plans and
foreign dividends.
+ Operating cashflows from domestic corporations
+ Depreciation
+ Dividends from foreign affiliates and subsidiaries
+Net equity issuance (new issues net of repurchases)
- Net debt issuance (new borrowing net of repayment)
- Interest payments on debt, less any interest income
- Taxes
- Net investment in non-current assets (net of asset sales)
- Net investment in working capital, inclusive of cash and
marketable securities

Dividend Capacity
Effect of Investment Plans
• Total Net Investment is the single most important factor in
determining dividend payouts to shareholders.
• Funding investments with internal funds is the first choice of

management, followed by borrowing or share issues.
• Fast-growing companies would be associated with low

dividend distributions.
• This involves buying the shares from stockholders using the
firms distributable reserves. It increases EPS (earnings per
share) since the number of issued shares is reduced.
• The markets generally react favorably to such corporate actions. It is more

preferable for the excess cash to be returned to shareholders rather than to
be retained within the company’s reserves especially if there are no other
investment opportunities.
Effect of Share Repurchases

Dividends from overseas operations
• Corporations can fund their dividend payments by

triggering repatriations. Some companies rely on their
offshore subsidiaries to finance dividend payments.
• Dividend repatriations represent significant financial

cashflows for parent companies even when this is not
tax efficient.
• These repatriations offer an attractive source of funds, especially

when the parent company may prefer a smooth dividend payment
pattern and domestic profitability is in decline.
Tax regime and dividend payments
Tax considerations are thought to be the primary

reason for dividend policies within multinational
firms.
The parent company may reduce its overall tax liability,
for example, by receiving larger amounts of dividends
from subsidiaries in countries where undistributed
earnings are taxed.
The US does not distinguish between income earned

abroad and income earned at home and gives credit to
multinational corporations (MNCs) with headquarters in
the US for the amount of tax paid to foreign
governments.
Transfer Pricing
• A transfer price is defined as the price at which goods or
services are transferred from one process or department to
another.
• Giving profit-center managers the freedom to negotiate prices with
other profit centers as though they were independent companies will
tend to result in market-based prices. Both divisions may benefit from
lower costs of administration, selling and transport.
• The market price may be temporary, induced by adverse economic

decisions or dumping. Some products may not have an equivalent market
price and the price of a similar product may be chosen. In such a case, the
option to buy or sell on the open/outside market does not exist.
• Multinational corporations (MNCs) have to adhere to pricing
guidelines to prevent exploitation of the host country.
• Firms set transfer prices on intra-firm transactions for a variety of

perfectly legal reasons. Governments may require it in order to
determine the computation of tax revenues and customs duties.
• Transfer price manipulation exists when MNCs use transfer prices

to evade or avoid payment of taxes and tariffs. MNC after-tax profits
may be raised by manipulating the corresponding invoices.

Regulation and transfer price manipulation

Arm’s Length Standard
• Arm’s length standard – states that intra-firm trade of
multinationals should be priced as if they took place between
unrelated parties acting at arm’s length in competitive markets.
Alternative Methods
a) Comparable Uncontrolled Price (CUP)
b) Resale Price(RP)
c) Cost plus (C+)
d) Profit split (PS)

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Dividend Policy in

Multinationals and Transfer

Reported by: Meynardo Talens Jr

For multinational companies, the capacity would

• Funding investments with internal funds is the first choice of

• Fast-growing companies would be associated with low

• The markets generally react favorably to such corporate actions. It is more

Effect of Share Repurchases

• Corporations can fund their dividend payments by

• Dividend repatriations represent significant financial

• These repatriations offer an attractive source of funds, especially

Tax considerations are thought to be the primary

The US does not distinguish between income earned

• The market price may be temporary, induced by adverse economic

• Firms set transfer prices on intra-firm transactions for a variety of

• Transfer price manipulation exists when MNCs use transfer prices

Regulation and transfer price manipulation

c) Cost plus (C+)

d) Profit split (PS)

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