Just as a parent may pay a child ahead of time for cutting the lawn or defer repayment of a loan for a long period of time, an MNC may advance payment of its accounts payable to a subsidiary or defer collection of its accounts receivable from a subsidiary. Postponing repayment of a large obligation has the same effect on a subsidiary's cash flow and working capital as does granting a cash loan: it increases the funds available for production.
Because of MNCs' liberal use of this method of maneuvering liquid assets, tax authorities have set certain conditions. For example, loan agreements must specify an interest rate and date of maturity; otherwise the loans are "deemed dividends"-that is, considered to be taxable income. There are, of course, certain drawbacks to these methods of maneuvering liquid assets. Because loans and accounts receivable and payable are exposed assets, there is always the risk that exchange rate changes will create losses that wipe out the gains.
- 803 reads
