OPENING CASE: Skype Now a Division of Microsoft
Summary
The opening case describes Microsoft’s acquisition of Internet communications company Skype
in an all-cash deal worth $8.5 billion. The company financed the deal using cash stored overseas
in countries with low corporate tax rates. Discussion of the case can revolve around the
following questions:
QUESTION 1: What were the benefits to Microsoft’s shareholders of using cash held overseas to
purchase Skype?
ANSWER 1: Microsoft used cash held overseas in foreign subsidiaries located in countries with
QUESTION 2: Microsoft notes that it would be taxed $9.2 billion, or 31 percent of its $29.5
billion in cash holdings, if it repatriated its foreign earnings to the United States. The U.S.
corporate tax rate is currently around 35 percent. Explain the discrepancy.
ANSWER 2: Microsoft and other companies have established foreign subsidiaries in countries
QUESTION 3: Why does Microsoft continue to hold so much cash overseas, rather than
returning it to the United States? What do you think are the opportunity costs of holding tens of
billions of dollars of cash in foreign locations? What potential benefits might accrue to Microsoft
shareholders if it returned some of that cash to the United States?
ANSWER 3: Holding cash overseas is a business strategy that will allow the company to pay
QUESTION 4: Do you think it is ethical for companies like Microsoft to continue to hold cash
overseas in order to avoid paying U.S. corporate income taxes? Is this practice always in the best
interests of the company’s shareholders?
ANSWER 4: Companies holding cash outside of the United States are following strictly legal
guidelines set up by accounting and financial bodies around the world. Public companies have a
fiduciary responsibility—like it or not—to their shareholders to make as much money for them
as possible. It may not be ethical, but it is certainly legal.
Another Perspective: For more information on Microsoft’s tax minimization strategies, go to
{http://www.ibtimes.com/minecraft-nokia-skype-how-microsoft-buys-overseas-companies-avoid
-us-taxes-1693869}.
CRITICAL THINKING AND DISCUSSION QUESTIONS
QUESTION 1: Why do the accounting systems of different countries differ? Why do these
differences matter?
ANSWER 1: Accounting systems are shaped by the environment of the country, and have
QUESTION 2: Why might an accounting-based control system provide headquarters
management with biased information about the performance of a foreign subsidiary? How can
these biases best be corrected?
ANSWER 2: There are three primary reasons why accounting based control systems may
provide headquarters management with biased information about the performance of a
subsidiary: exchange rate changes, transfer prices, and general economic conditions. Because
QUESTION 3: You are the CFO of a U.S. firm whose wholly owned subsidiary in Mexico
manufactures component parts for your U.S. assembly operations. The subsidiary has been
financed by bank borrowings in the United States. One of your analysts told you that the
Mexican peso is expected to depreciate by 30 percent against the U.S. dollar on the foreign
exchange markets over the next year. What actions, if any, should you take?
ANSWER 3: This issue suggests that some interest and principal will have to be repaid in U.S.
dollars in the near future, but the plan was likely to pay this off out of earnings from the Mexican
subsidiary. Paying off the entire loan in advance before the peso depreciates would be a good
QUESTION 4: You are the CFO of a Canadian firm that is considering building a $10 million
factory in Russia to produce milk. The investment is expected to produce net cash flows of $3
million every year for the next 10 years, after which the investment will have to close down due
to technological obsolescence. Scrap values will be zero. The cost of capital will be is 6 percent
if financing is arranged through the Eurobond market. However, you have an option to finance
the project by borrowing funds from a Russian bank at a 12 percent. Analysts tell you that due to
high inflation in Russia, the Russian ruble is expected to depreciate against the Canadian dollar.
Analysts also rate the probability of violent revolution occurring in Russia within the next ten
years as high. How would you incorporate these factors into your evaluation of the investment
opportunity? What would you recommend that the firm do?
ANSWER 4: In considering these investments there are three basic steps:
make a basic analysis
There are several different ways of approaching this problem, and the method outlined below is
just one. Different assumptions would lead to different answers.
(1) Make a basic analysis of the investment:
(2) Adjust for risk:
In the case of Russia, the likelihood of violent revolution, which could damage the plant
(3) Determine whether it would be better to fund the project from Canada or Russia or not at all.
After more careful analysis, both choices would likely yield a positive net present value,
although which one is higher is not obvious. While one can make estimates for the risks and
CLOSING CASE: Google and Its Tax Strategy
Summary
The closing case describes the tax strategy used by Google to set up subsidiaries in various
countries other than the United States to take advantage of the very low corporate tax rates in
those countries. Discussion of the case can revolve around the following questions:
QUESTION 1: Do you think it is ethical for companies like Google to continue to use shell
companies to avoid paying taxes in higher-tax-rate countries? Is this practice always in the best
interests of the company’s shareholders and customers?
ANSWER 1: Student responses will vary. Some may consider it unethical for a company based
in the United States that benefited from taxpayer-funded infrastructure to deliberately avoid
paying taxes on its earnings. Others will argue that a firm’s only ethical responsibility is to
QUESTION 2: Should the “Double Irish” tactic be outlawed globally and, if so, how would you
go about doing it?
ANSWER 2: Student answers will vary depending on their response to question 1. Nevertheless,
QUESTION 3: What about the “Dutch Sandwich” move? Is this too much tactical game playing
for a large company such as Google? Explain.
ANSWER 3: Student answers will again vary depending on their responses to question 1. From
QUESTION 4: Since there is no income tax in Bermuda, what does Bermuda gain from being
“home” to Google’s operations in Europe?
ANSWER 4: Countries such as Bermuda and other tax havens gain significant economic benefits
End of Part Case Notes
Part Six
Brazil’s Gol Airlines
1. What were the benefits to Gol of a listing on the New York Stock Exchange in addition to the
Sao Paulo Bovespa?
Answer: By listing on the NYSE, Gol was able to build recognition of its business model
2. Why do you think the Gol stock offering was oversubscribed?
Answer: Most students will probably suggest that Gol’s position of being one of the fastest
3. Do you think Gol would have raised as much money if it had just listed on the Sao Paulo
exchange?
Answer: By listing its stock on both the New York Stock Exchange and the Brazilian stock
4. How might the joint listing of the New York and Sao Paulo stock exchanges affect Gol’s
ability to raise additional capital in the future?
Answer: Gol’s successful stock offering helped propel the company into a tier one airline in
Staffing Policy at AstraZeneca
1. What international staffing policy is AstraZeneca pursuing with regard to its high-potential
employees?
Answer: AstraZeneca’s strategy for foreign assignments involves selecting only those individuals
2. Why does AstraZeneca limit this policy to just high-potential employees? Can you see a
drawback in doing this?
Answer: AstraZeneca sends only high potential employees on foreign assignments because of the
high cost involved with expatriates. AstraZeneca believes that it is critical to not only carefully
3. What staffing policy is AstraZeneca adopting with regard to its subsidiaries in places such as
China? Is that an appropriate policy?
Answer: AstraZeneca has found staffing policy particularly challenging in China where its
operations have more than tripled in the last decade. Because skilled employees are hard to find,
4. Do you think the company is doing enough to limit the well-known risks and costs associated
with high expatriate failure rates? Is there anything else it might do?
Answer: Beginning with its selection process, AstraZeneca devotes considerable resources to
ensuring that its managers are in the best position possible to be successful in their foreign
INCORPORATING globalEDGE™ EXERCISES
Use the globalEDGE™ site {globaledge.msu.edu/} to complete the following exercises:
Exercise 1
The inflation rate of a country can affect financial planning in multinational corporations since
the value of receivables in each country can face significant devaluation if the inflation rates are
high. Your company has operations in the following countries: Belarus, Costa Rica, Finland,
Iceland, Paraguay, Thailand, and Zimbabwe. Use the Country Comparator on the globalEDGE
site to rank the risk of devaluation of your company’s receivables from highest to lowest, based
on the most recent data available for each country. What precautions can your company take in
the countries at the top of this list to minimize the risk?
Exercise 1 Answer
Search phrase: Country Comparator
Resource Name: Country Comparator
Website: http://globaledge.msu.edu/comparator
globalEDGE Category: Knowledge Tools
Additional Info:
Country Comparator is a globalEDGE tool that allows users to generate a comparison of
countries based on a number of economic indicators. A user can first select up to five indicators
and then up to 20 countries to compare in a table format.
Exercise 2
The top management of your company has requested information on the tax policies of
Argentina. Using the country guide for Argentina on Deloitte International Tax and Business
Guides—a resource that provides information on the investment climate, operating conditions,
and tax systems of major trading countries—prepare a short report summarizing your findings on
business taxation in Argentina.
Exercise 2 Answer
Search phrase: Deloitte International Tax and Business Guides