Deck 18: Takings and National Controls on Foreign Direct Investment

Question 1

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.

Answer 1

True

Question 2

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

Answer 2

True

Question 3

Cases involving the payment of compensation for the expropriation of property must be settled in courts of law.

Answer 3

False

Question 4

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

Question 5

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

Question 6

All foreign nations permit foreign majority ownership of some type.

Question 7

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

Question 8

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 9

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.

Question 10

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

Question 11

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.

Question 12

North American and Western European countries generally accept the modern traditional theory of the taking of private property as customary international law.

Question 13

The first alternative for a victim of nationalization would be to seek relief in the courts of the country where the property was nationalized.

Question 14

The political risk of investing in developed countries is roughly comparable with the risks of investing in the developing countries.

Question 15

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

Question 16

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

Question 17

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

Question 18

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

Question 19

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

Question 20

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

Question 21

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

Question 22

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

Question 23

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

Question 24

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

Question 25

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 26

The precise structure of inactive investment in a foreign nation depends largely on the treatment of the structure under the tax laws of the host country and the U.S.

Question 27

Simplification and centralization of foreign investment pre-approval procedures have become commonplace in developing countries in recent years.

Question 28

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 countries approved by the Department of Treasury.

Question 29

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

Question 30

Under U.S.law,corporations are taxed on all income,including income from foreign sources.

Question 31

Artificially manipulated pricing between related corporations is known as transfer pricing.

Question 32

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 33

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 34

The establishment of a branch overseas will have few tax consequences under U.S.tax law.

Question 35

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

Question 36

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

Question 37

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 38

An example of an active investment is the joint venture.

Question 39

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

Question 40

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

Question 41

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 42

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 43

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 44

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 45

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 46

In order to maintain operational control over a joint venture,the foreign partner may enter into which of the following:

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 47

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 48

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 49

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 50

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 51

Under the Foreign Sovereign Immunities Act,federal courts in the U.S.cannot hear which of the following cases:

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 52

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 53

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 54

Developing countries usually welcome foreign investment in which of the following cases:

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 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

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 57

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 58

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 59

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 60

Americans have begun to offer their securities to investors abroad through:

A) The New World Stock Exchange.
B) Standard and Poor's.
C) The Black Market.
D) The Euroequity Market.

Question 61

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

Question 62

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 63

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 64

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 65

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

Question 66

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 67

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

Question 68

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

Question 69

A foreign investor may take a case against a foreign government to arbitration where:

A) The arbitration has been ordered by the president.
B) The Foreign Sovereign Immunities Act requires it.
C) The act of state doctrine requires it.
D) The foreign nation consents to it.
E) All of the above.

Question 70

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

Question 71

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

Question 72

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

Question 73

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

Question 74

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 75

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

Question 76

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

Question 77

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 78

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 79

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 80

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.