Deck 18: The Legal Environment of Foreign Direct Investment

Question 1

In the case of nationalization, the party whose property has been subject to a taking may elect to receive either the fair market value as estimated by a government agency or the saleable value as identified by independent valuation specialists.

Answer 1

False

Question 2

U.S. multinational corporations are generally safer in building a factory in a foreign country that has entered into an investment treaty with the United States than in a country that has no such treaty.

Answer 2

True

Question 3

Under the laws of most legal systems, governments do not have the authority to take private property for public use.

Answer 3

True

Question 4

OPIC insurance does not provide coverage against the loss of assets by U.S. firms in the case of the nationalization of farms or factories held in a foreign country.

Question 5

Insurance is available from the U.S. AID to U.S. firms against the expropriation of their property by a foreign government.

Question 6

The term nationalization usually applies to the expropriation of an entire industry or natural resource of a nation.

Question 7

Virtually every foreign country prohibits entities controlled by foreigners in a number of particularly sensitive sectors.

Question 8

Once a foreign firm creates a subsidiary abroad under its control, it risks waiving its protection under bilateral investment treaties.

Question 9

Investors receiving compensation for the nationalization of property in a foreign country generally obtain payment in United States dollars, thus avoiding any currency risk.

Question 10

The modern traditional theory recognizes the sovereign's right to nationalize foreign-owned property but places conditions on the exercise of that right.

Question 11

North American and Western European countries generally accept the modern traditional theory of the taking of private property as provided under the "due process" clause of the U.S. Constitution.

Question 12

If a U.S. company chooses to establish a wholly-owned subsidiary abroad, it faces less potential vicarious liability because it is separated from the branch.

Question 13

An American firm that builds a factory abroad for the building of component parts to be shipped back to the United States does not qualify for OPIC insurance.

Question 14

As a general rule, firms are responsible for the torts committed by their foreign subsidiaries under the alien tort claims act but not by their foreign branch offices.

Question 15

All foreign nations permit foreign majority ownership of critical industries to the security of the host country.

Question 16

In the case of nationalization, "adequate" compensation is defined as fair market value minus accumulation of depreciation.

Question 17

The creation of a foreign subsidiary has few tax consequences to the foreign firm.

Question 18

OPIC insurance is provided to U.S. firms operating abroad by private American insurance companies.

Question 19

OPIC insurance is primarily intended to protect U.S. investments in Japan, Canada and Western Europe.

Question 20

Classical theories on the taking of property of foreign citizens by governments were originally developed to protect the interests of European investments abroad.

Question 21

The United States does not tax foreign subsidiaries on the income they earn abroad.

Question 22

An example of an active investment is the licensing of technology to a foreign firm.

Question 23

The "transfer pricing" provision attempts to identify the taxable income had the transaction been between unrelated parties dealing at arm's length.

Question 24

World Motors assembles automobiles in the United States from engines produced by its subsidiary corporation in Country X. In order to shift its tax liability, World Motors instructs the subsidiary in Country X to overvalue its invoice price of the engines. This is known as:

A) price discrimination.
B) foreign source income.
C) transfer pricing.
D) taxation pricing.

Question 25

Artificially manipulated pricing between joint venture corporations is known as transfer pricing.

Question 26

The essential problem in soft-currency countries is that despite the sufficient amount of hard currency available, the excessive bureaucratic and regulatory framework makes gaining access to that currency very difficult.

Question 27

Under U.S. law, corporations are taxed on all income, including income from foreign sources that is repatriated back to the United States.

Question 28

Even if an investor proposes to bring a desired industry to a soft-currency nation, it will generally not be possible to get currency exchange rights (preferential access to hard currency).

Question 29

Because passive investments create the least risk of foreign control, they are the least regulated of foreign investments.

Question 30

A foreign investor may enter into a joint venture by combining with a national of a host country to create a new entity or by acquiring a portion of an existing local entity.

Question 31

Often, investors must create legal structures for their investment that will maximize the foreign venture's U.S. dollar resources. These might include:

A) borrowing start-up money in local currency.
B) buying supplies and services locally, using local currency.
C) building unitary index adjustment factors into contractual payment terms.
D) all of the above.

Question 32

In order to qualify as a foreign sales corporation under U.S. tax law, the company must have management outside of the United States in one of the less developed countries approved by the Department of Treasury.

Question 33

The establishment of a branch overseas will have tax consequences as ordinary business income under U.S. tax law.

Question 34

Incontrovertibility risk may hinder a U.S. investor in a foreign country from trading the foreign currency back into U.S. dollars.

Question 35

Passive investment in less-developed countries is similar to other developed countries since equity shares are easily transferable worldwide.

Question 36

One tax issue that presents no problem for a U.S. investor is the question of crediting taxes it has paid to a foreign country against taxes it would have to pay the U.S. on its federal return.

Question 37

Dividends paid from a foreign subsidiary to the U.S. parent company are not taxable under U.S. law.

Question 38

An investment in which the investor limits its involvement to providing equity capital in an enterprise managed by another in hope of a profitable return is called a(n):

A) active investment.
B) leveraged investment.
C) passive investment.
D) inactive investment.

Question 39

A host country that progressively limit the exercise of ownership rights by a foreign firm is progressive nationalization.

Question 40

Under the Foreign Sovereign Immunities Act, the United States courts have jurisdiction over disputes between U.S. firms and the foreign states that expropriated assets without market value compensation.

Question 41

If a U.S. firm creates a foreign subsidiary corporation, it:

A) fully subjects it to income taxation in the foreign country.
B) fully avoids taxation in the United States on income repatriated from the foreign subsidiary.
C) will significantly reduce its taxable income.
D) none of the above.

Question 42

Under the modern traditional theory, the sovereign may nationalize foreign-owned property only where:

A) it is for a public purpose.
B) the foreign firm that owned the property was operating it unprofitably.
C) a communist government takes over the country.
D) the foreign firm has continuously violated the laws of the host country.

Question 43

Where the government expropriates property, the former owner will receive:

A) the same amount of compensation as a victim of nationalization.
B) a higher amount than a victim of nationalization.
C) a lower amount than a victim of nationalization.
D) A, B, or C.
E) A or B.

Question 44

If a foreign investor is prohibited by the host country's laws from owning a majority of a joint venture, another way to gain operational control is:

A) secretly to have other foreign nationals invest money in trust for the investor.
B) to use American management techniques with cumulative voting for the board of directors.
C) to surround the joint venture with contractual obligations to the foreign investor.
D) A and C.

Question 45

All of the following are alternative methods for a U.S. investor entering into a joint venture in a foreign country except :

A) a foreign partnership.
B) a foreign corporation.
C) a U.S. corporation with a foreign branch.
D) a foreign expropriation.

Question 46

When private property is seized gradually by a foreign government, it is known as:

A) crawling expropriation.
B) creeping expropriation.
C) gradual encroachment.
D) none of the above.

Question 47

​ Which of the following can the partner agree to i n orde r t o maintai n operationa l contro l ove r a join t venture ?

A) Marketing agreements
B) Supply agreements
C) Contracts with management
D) Maintain veto power in the joint venture agreement
E) All of the above

Question 48

Which is not a type of adjustment to regulations often addressed in privatizations?

A) Exemptions from taxation
B) Exemptions from regulations affecting tariffs, rates of return and technical standards
C) Right of first refusal rights in future privatization efforts
D) Remittance rights on capital and other exemptions from regulations relating to repatriation of profits and exchange rates

Question 49

The vehicle of choice most often for a U.S. investor who wishes to exercise a measure of control over its foreign investment is a(n):

A) interlocking directorate.
B) investment trust.
C) joint venture.
D) all of the above.

Question 50

The precise shape of the structure to be pursued by a U.S. active investor - branch, subsidiary, etc. - in a foreign country depends largely on the tax treatment of the host country and U.S. laws. In many cases:

A) no taxes will be owed.
B) remittances from branches are taxed at a higher rate than dividends from a subsidiary.
C) profits are taxed at a lower rate due to depreciation schedules of certain countries.
D) none of the above.

Question 51

Modern traditional theories of the taking of private property are followed by:

A) most developed industrialized countries.
B) most developing countries.
C) most communist countries.
D) all of the above.

Question 52

In order to avoid double taxation on the income of foreign subsidiary companies, U.S. tax law:

A) does not tax income repatriated to the U.S. parent company.
B) allows the U.S. parent company to take a 100 percent tax credit for foreign income taxes paid.
C) provides a deduction for foreign income taxes paid.
D) none of the above. U.S. companies are usually subject to double taxation when they have foreign subsidiaries.

Question 53

Which of the following cases cannot be heard by the U.S federal courts unde r th e Foreig n Sovereig n Immunitie s Act ?

A) The foreign government breached a contract with the U.S. firm for the sale of goods
B) A dispute over the amount of compensation paid by a foreign government to a U.S. investor when the investor's real estate was taken to build a national airport
C) The foreign government is being sued for money damages sought as a result of personal injury or death caused by the foreign government or its agents in the United States
D) All of the above are exceptions

Question 54

Under the modern traditional theory of the taking of property, a sovereign may take private property only where:

A) the property is taken for a public purpose.
B) the taking is nondiscriminatory.
C) the taking is accompanied by a prompt, adequate, and effective compensation.
D) all of the above.

Question 55

In order to qualify for the favorable tax treatment of a Foreign Sales Corporation, a U.S. firm must meet all of the following tests, except :

A) at least one director must be a nonresident of the U.S.
B) its income must be derived from qualified export activity such as the sale of goods abroad.
C) management must be outside the U.S.
D) none of the income may be repatriated to the United States.
E) the FSC must participate in soliciting, negotiating, or contracting with a foreign buyer.

Question 56

When choosing to establish a foreign branch or subsidiary, a prime factor in the U.S. company's decision is:

A) the tax rates applicable to different forms of organizations.
B) the investment tax credit given by the foreign country.
C) whether the foreign taxes are creditable taxes for U.S. purposes.
D) both A and C.

Question 57

A U.S. enterprise that wishes to establish an entity abroad under its control may create a subsidiary or branch:
I. Once either of these is established, the company may waive Rights of Protection under the U.S. bilateral investment protection agreements.
II. If the company chooses a subsidiary, it will not be directly answerable for liability.

A) I only.
B) II only.
C) Both I and II.
D) Neither I nor II.

Question 58

In which of the following cases do the developin g countrie s encourage foreig n investmen t?

A) Companies producing quality consumer goods because these firms bring a variety of needed products at reasonable prices for consumers
B) Companies producing goods for export
C) Companies investing in telecommunications and transportation industries
D) Companies investing in the oil and gas industry and other natural resources

Question 59

International investment disputes are arbitrated by:

A) The International Chamber of Commerce.
B) The International Centre for the Settlement of Investment Disputes.
C) The United Nations.
D) all of the above.
E) A and B only.

Question 60

Under the modern traditional theory, the sovereign may nationalize foreign-owned property only where:

A) it is done promptly.
B) it is done in a reasonable manner.
C) it is done after the foreign firm has been convicted of criminal behavior in the host country.
D) it is done in a nondiscriminatory fashion.

Question 61

Weigh the strengths and weaknesses of the various methods that a business may use to ensure access to hard currency.

Question 62

Under the Foreign Sovereign Immunities Act, a federal court would not have jurisdiction over a foreign nation unless:

A) the foreign nation's acts were diplomatic in nature.
B) authority has been granted for the court to hear the case by the president of the United States.
C) the foreign government's actions constitute a commercial activity.
D) the foreign government committed an act of state.

Question 63

Identify countries that have views regarding the taxation of e-commerce that are most (or least) favorable to U.S. e-merchants.

Question 64

Compare and contrast the partial sale, trade sale, and concession models of privatization.

Question 65

Suppose that you plan to set up a subsidiary in a foreign country. Devise a list of the types of tax incentives you seek to accrue.

Question 66

The difficulties associated with private political risk insurance include all of the following except :

A) it is difficult to obtain.
B) it is very costly.
C) the approval process is slower than with public insurance agencies.
D) the terms of many private political risk policies are limited to a very short period of time.

Question 67

Weigh the relative benefits and detriments of changing from a sales tax to a value-added tax. What other information would be important to you in making this assessment?

Question 68

Write a memo to the legislature advocating the adoption of a particular tax exemption system.

Question 69

Weigh the relative benefits of political risk insurance from government agencies and private insurers.

Question 70

Write a treaty provision regarding the taxation of e-commerce.

Question 71

Compare and contrast different types of passive investments and the risks and benefits associated with each.

Question 72

Explain the differences among the three main theories of compensation for government takings of foreign-owned properties.

Question 73

Presume that you are considering investing in a foreign business/industry that is about to undergo government privatization. Draft a set of negotiation objectives you wish to address with the government.

Question 74

Considering the different types of currency risk associated with foreign transactions, which is most salient for a U.S. business?

Question 75

Compare and contrast the traditional and modern traditional theory of takings.

Question 76

Political risk or investment insurance is available in the United States through a U.S. government agency known as:

A) The Overseas Public Investment Commission.
B) The Overseas Private Investment Corporation.
C) The Open Private Insurance Corporation.
D) The Overseas Panel for Insurance Coverage.

Question 77

Explain and assess the different methods that a business may employ to reduce the political risk associated with a foreign investment.

Question 78

California Agricultural Aircraft Services, Inc. (CAAS) is a California corporation headquartered in Sacramento. CAAS leases aircraft to crop dusting businesses through California. CAAS entered into a contract with Shànghai Aircraft Company (SAC), a state-owned enterprise organized pursuant to the laws of the People's Republic of China. The contract provided for the manufacture by SAC and purchase by CAAS of ten crop dusting aircraft at a price of U.S. $2.1 million, a savings of approximately $200,000 compared to crop dusting aircraft available from other manufacturers. One of the aircraft delivered to CAAS was subsequently leased to Central Valley Crop Dusting, Inc. (CVCD), a California corporation. One month later, this aircraft crashed during a CVCD spraying operation resulting in a complete loss of the aircraft and serious injuries to the pilot. The pilot stated that the engine lost power and then caught on fire while he was attempting an emergency landing. Subsequent investigations by federal and state authorities determined the sole cause of the crash to be catastrophic engine failure. CVCD and its pilot subsequently initiated litigation in the San Joaquin County Superior Court against CAAS, claiming breach of numerous provisions within the lease agreement, strict product liability and negligence. CAAS immediately notified SAC regarding the litigation and requested indemnification, but SAC did not respond to this request. CAAS is now contemplating joining SAC as a co-defendant to CVCD's lawsuit. What defense could SAC assert to the exercise of personal jurisdiction by the San Joaquin County Superior Court? What does this defense provide? Would this defense be successful in this case? Why or why not?

Question 79

Draft a model law (plan or treaty) for government privatization. This may be done with an eye toward privatizing through national or foreign investment.

Question 80

Assess the arguments for and against taxing e-commerce at an international level as opposed to a domestic level.