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The CPA Journal Online
Oct 1991
Record keeping for U.S. corporations with foreign ownership.
by Feinschreiber, Robert
Abstract- Foreign-based corporations in the US, functioning as reporting corporations, are required by the IRS to provide, maintain, and retain records regarding its transactions through newly issued regulations contained in Sections 1.6038A-1. Reports must furnish information relating to the company's financial activities with its US subsidiaries. The reporting and maintenance requirements are intended to bring more attention to the foreign related party's relationship with the reporting corporation through their direct or indirect transactional records. The upkeep of records in the US may not be necessary if the reporting firm is willing to construct such records in the US. The de minimis value rules may be used by smaller companies to do away with most of the requirements for reporting and record maintenance.
The IRS wants its fair share of tax on international activities and trading. To achieve that end the IRS must know the extent of the transactions between U.S. corporations and related foreign entities. New final requirements for such dealings. The IRS wants to have records available, in English, to enable it to determine the "correct treatment" of transactions.
Foreign-based corporations and their U.S. subsidiaries face extensive new reporting obligations.
New Regs. Secs. 1.6038A-1 through 7, issued in June 1991, indicate the information to be furnished, the records to be maintained, and the new agency relationships to be sustained. These regulations impose new reporting requirements on both U.S. corporations and foreign related parties.
REPORTING CORPORATIONS
AND FOREIGN RELATED
PARTIES
Certain foreign-owned U.S. corporations are to be termed "reporting corporations." They must furnish information annually and must maintain records relating to their transactions with certain related parties. The "related foreign persons" are required to authorize the reporting corporation to act as their agent in receiving the legal documents that give the IRS access to information about transactions between the entities.
The regulations are divided into seven sections, each with its own section number:
* Definitions of terms used in the statute, Sec 6038A; * Information to be submitted and the filing of the return, Form 5472, on an annual basis; * Maintenance of records; * Monetary penalty for failure to furnish information or maintain records; * Agent authorization; * Failure to furnish information requested by a summons; and * Noncompliance penalty for failure to authorize an agent or for failure to comply with a summons.
Reporting Corporation
In general, a reporting corporation is a U.S. domestic corporation that is 25% foreign-owned. A corporation is 25% foreign-owned if it has at least one "25% foreign shareholder" at any time during the taxable year. A 25% foreign shareholder must meet a voting power or value test. The shareholder of the corporation must own at least 25% of either the total voting power of all classes of stock of the corporation that are entitled to vote, or the total value of all classes of stock of the corporation.
Shifting of voting power may be disregarded. All facts and circumstances are to be taken into account in determining whether a foreign person owns 25% of the total voting power of all classes of stock of the corporation entitled to vote, or whether the person owns 25% of the total value of all classes of stock of the corporation. Subpart F contains a provision under which arrangements to change voting power are disregarded; similar considerations apply here.
A reporting corporation may also be a foreign corporation that is 25% foreign-owned and engaged in trade or business within the U.S. A reporting corporation now includes a foreign corporation engaged in a trade or business within the U.S. at any time during the taxable year. This rule came about as a result of OBRA 90, and it applies after November 4, 1990.
Foreign Related Party
The primary emphasis of the stepped-up reporting requirements is to focus on transactions between the reporting corporation and a "foreign related party." A foreign related party is a "foreign person" that is also a "related party." This dual requirement encompasses the relationship to the reporting corporation and the foreign structure of the entity.
Foreign Persons
Various types of entities are "foreign persons," including individuals, partnerships, corporations, trusts, estates, and governmental institutions. An individual is a foreign person if the person is not a citizen or resident of the U.S.; an expatriate might be a foreign person for this purpose. A foreign person does not include any individual who has a current joint return election in effect. Any individual who is a citizen of any possession of the U.S. is a foreign person if the individual is not otherwise a citizen or resident in the U.S. A possession of the U.S. is considered a foreign country for the purposes of this provision.
Any partnership, association, company, or corporation is a foreign person if it is not created or organized in the U.S. or under the laws of the U.S. or any state. Any foreign trust or foreign estate is a foreign person, too.
A non-exempt foreign government or foreign controlled commercial entity is considered a foreign person to the extent that the entity is engaged, directly or indirectly, in a U.S. trade or business and receives non-exempt income. However, a foreign government or foreign controlled commercial entity is treated as a foreign person only for this limited purpose, i.e., the filing of Form 5472, but not for record maintenance.
Related Party
A "related party," the second part of the "foreign related party" requirement, has to have one of three relationships: A related party is a 25% shareholder of a reporting corporation; the vote and value test applies in determining status as a 25% foreign shareholder. A related party includes any person who is "related" to the reporting corporation. Finally, a related party includes any person who is "related" to a 25% foreign shareholder of the reporting corporation. These relationships encompass a myriad of trust, family, and corporate as well as partnership relationships. Attribution rules apply to corporate constructive ownership and partnership interests.
Any other person that is "related to the reporting corporation" within the inter-company pricing provisions of Sec. 482 is a related party. Extensive case law determines this "related to" concept, but the statute does not directly deal with this relationships itself. For this purpose, a related party does not include any corporation filing a consolidated federal income tax return with the reporting corporation.
See Figures 1,2, and 3 for examples of a reporting corporation, a non- reporting corporation, and of a foreign related party.
DE MINIMIS EXCEPTION
Smaller companies can avoid most of the reporting requirements, if the de minimis exception applies to the record retention rules. A safe harbor for reporting corporations is based on a de minimis value of the related party transactions. This small company safe harbor is distinct from both the small amount rule within the tax return reporting requirements and the reasonable cause penalty provisions. Moreover, this de minimis safe harbor has no relationship to a safe harbor for record maintenance that could only apply to larger companies.
Gross Payments and Percentage
Tests
If the de minimis value rules are applicable to a corporation, the record maintenance rules and the agency provisions do not apply. However, such a corporation is subject to the information reporting requirements and general record maintenance requirements. The de minimis value rules apply if both a gross payment test and a percentage test are met.
Under the gross payment test, a reporting corporation must have transactional values that are less than $5 million. This $5 million amount is based on gross payments made by a reporting corporation to a related party or to a reporting corporation by a related party. This aggregate value of gross payments encompasses three types of consideration: monetary consideration, nonmonetary consideration, and the value of transactions involving no consideration.
Under the percentage test, the gross payments to or from foreign related parties must be less than 10% of its gross income. The use of gross income in this context is peculiar; this phrase applies only once in the context of the foreign reporting requirement rules. As a practical matter, the percentage test on top of the gross income test would ordinarily make the de minimis safe harbor provisions inoperable.
Netting and Aggregation
In reporting on these matters, amounts are not netted. Threshold amounts are to be applied separately as "amounts paid to foreign related parties" and "amounts received from foreign related parties." The "no netting" rule presumably applies to both the "aggregate value" test and the percentage test.
Although aggregate amounts are not netted, they are totaled. Related party transactions are totaled by aggregating the value of gross payments made to a foreign related party and amounts received from a foreign related party. These gross amounts are totaled by combining the dollar amounts of the related party transactions, including foreign related party transactions for which only monetary consideration is paid and received, and foreign related party transactions involving nonmonetary consideration or no consideration.
Transactions between the reporting corporation and foreign related parties are combined. The aggregate value of gross payments to all foreign related parties and the aggregate value of payments received from all foreign related parties are computed for all related reporting corporations. The aggregate value is determined by totalling all dollar amounts to or from all foreign related parties. In reporting to the IRS, Form 5472 is used for the foregoing purposes by all related reporting corporations.
A separate exclusion applies to corporations with less than $10 million in gross receipts. The extent of the intercompany transactions is irrelevant in this context.
CONSOLIDATED RETURNS
If a U.S. consolidated income tax return is filed, the return requirement may be satisfied for the entire U.S. consolidated group by filing a consolidated Form 5472. This form is filed by the common parent, which must attach Form 851 and a schedule indicating the members of the U.S. consolidated group that would otherwise be separate reporting corporations. The schedule must provide name, address, and taxpayer identification number as basic data for each member of the consolidated group.
A member of the consolidated group can file its own Form 5472 and is not required to join in a filing of a consolidated Form 5472. Other members of the group may choose to file one or more Forms 5472 on a consolidated basis.
Agency Provisions
Agency provisions provide for authorization by the foreign related party and acceptance by the reporting corporation. The common parent can perform this agency function by serving as the reporting corporation for a group of reporting corporations. The parent may be authorized to act as the agent for foreign related persons engaged in transactions with members of the consolidated return group in situations in which this agency relationship is solely for summons purposes.
The parent corporation can complete the agency authorization procedure by completing the authorization of agent form on Form 5472 or by filing an authorization of agency statement on Form 5472, if amended Form 5472 is not yet available. Each member of the consolidated return group must maintain the required records.
Monetary Penalties
The common parent and each reporting corporation may potentially be subject to monetary penalties. If these corporations file a consolidated Form 5472, each is liable jointly and severally for penalties for failure to file Form 5472 and for failure to maintain records. The U.S. parent is the sole agent for each subsidiary if the consolidated tax return is filed.
RECORD KEEPING
REQUIREMENTS
Both the reporting corporation and its foreign related parties have obligations to maintain and retain records. This requirement applies to records of the reporting corporation itself, and to foreign related parties with whom the reporting corporation has dealings. Records of any foreign related party may be relevant to determine the correct treatment of transactions between the reporting corporation and foreign related parties. The "correct treatment" standard, coupled with the "may be relevant" criterion, indicates the pervasive scope of these provisions.
The reporting corporation must keep the permanent books of account and records that are normally required under U.S. tax laws and regulations, but the regulations impose higher standards for specified information, documents and records. Under this standard, records must be "sufficient to establish the correctness of the federal income tax return of the corporation."
Sec. 6001 encompasses transactions between the reporting corporation and foreign related parties, but Sec. 6038A provides more detailed guidance. A taxpayer can elect to use a safe harbor for record keeping or reach a record retention agreement with IRS.
The safe harbor provides detailed rules for record maintenance. Under these provisions, a corporation that maintains or causes another person to maintain these records will be deemed to have met the record maintenance requirements. Nearly one hundred specific items are included within the safe harbor provisions.
A reporting corporation and the District Director may negotiate and enter into a record keeping agreement. This agreement may establish three aspects of the record keeping requirements:
* What records the reporting corporation must maintain or cause another to maintain; * How such records must be maintained; and * By whom these records must be maintained in order to satisfy the reporting corporation's obligations.
Statutory Authority
The statute provide the Treasury with almost totally pervasive authority over records pertaining to transactions between the reporting corporation and the foreign related party. This provision was added by OBRA 89, supplanting the TEFRA 82 provisions, and provides that the reporting corporation:
"Shall maintain (in the location, in the
manner, and to the extent prescribed
in regulations) such records as may
be appropriate to determine the correct
treatment of transactions with related
parties as the Secretary shall by
regulations prescribe (or shall cause
another person to maintain these records)."
The scope of this statutory authority is likely to be a frequent area of dispute between taxpayers and IRS.
Disputes can arise in situations in which:
* One party asserts that the regulations are legislative, not interpretive, and are entitled to more weight than interpretive regulations; * Establishment of the "correct treatment" of these transactions is contested; or * Appropriateness of the records is disputed.
Direct and Indirect Relationship
Records that are directly or indirectly related to transactions between the reporting corporation and any foreign related parties are subject to the maintenance requirements. The indirect relationship standard applies to foreign related parties and their subsidiaries, even in cases in which this subsidiary is not a foreign related party.
Example: A subsidiary of the foreign related party manufactures and assembles products. This product is subsequently sold as finished product by the foreign related party to the reporting corporation. The scope of these transactions includes indirectly related transactions, such as those dealing with raw material and component costs of this product.
Translation
When records are requested by IRS, any records or portion thereof not in the English language must be translated, within 30 days upon request of the District Director; this period may be extended under the scheduled production rule.
If transactions are engaged in by a partnership that are attributable to the reporting corporation, the reporting corporation is subject to record maintenance requirements to the extent of the transactions so attributed. A foreign government is not subject to the obligation to maintain records.
Confidentiality
The limited agency relationship between the parties contemplated by the IRC and regulations would normally provide that the foreign related party must provide a wide variety of records to the reporting corporation. In this situation, the foreign related party might consider such materials to be confidential and hence not available to the reporting corporation. This situation is likely to arise when the information includes salary data or comparative pricing strategies between the foreign headquarters operations and its subsidiaries in the U.S. and elsewhere, especially in situations where the headquarters may have established predatory pricing that favors its own home country affiliates. In this regard the reporting corporation and IRS might find themselves on the same side in the event of a disagreement with the parent.
Confidentiality may be misplaced in these agency situations, and in fact may be antithetical to Treasury tax objectives. Nevertheless, the Senate Finance Committee Report intends to make reporting corporations legally responsible to make sure that the specified materials are available in the U.S. The regulations do not require that these materials be placed under the control of the reporting corporation.
A foreign related party or third-party may make arrangements with IRS to furnish these requested records directly, rather than through the reporting corporation. This arrangement should be made with the District Director and is applicable to records requested by the IRS.
The onus for the record maintenance is placed on the reporting corporation, which is liable for maintenance of the records if the foreign related party or a third party maintain these records in the ordinary course of business. This liability continues even if the records are not in the possession of the reporting corporation. A reporting corporation may be subject to the monetary penalty if the foreign related party or the third party fails to maintain such records.
Situs of the Records
The Finance Committee had anticipated that the regulations would generally require records to be maintained in the U.S., but the statute gave the Treasury flexibility in prescribing which records must be maintained in the U.S. and which may be maintained elsewhere. Hence, reporting corporations may be able to maintain the records outside the U.S.
An exception to the U.S. situs requirements for these records can be made in situations in which the reporting party maintains the documents outside the U.S.
Delivery and Moving
Instead of maintaining records within the U.S., the reporting corporation can agree to produce them in the U.S. The reporting corporation can select between a "delivery" method or a "moving" method for production of these documents. Original documents need not be submitted, and duplicates can be used.
These materials normally must be submitted within 60 days from the time the request for them is issued by the IRS, but this time period is doubled for material profit and loss statements. This extra time is needed because of the onerous effort that would be required to assemble transactional records and create "material statements" within the confines of the significant industry segment test or the high profit test. Fortunately for the taxpayer, the material statement rules apply only to companies with relatively large transactions on a cumulative basis.
Under the "delivery" alternative, the reporting corporation must deliver to the IRS the original documents or duplicates of the original documents requested by IRS and must do so within 60 days of this request. The reporting corporation must provide translations of these documents within 30 days of a request for such translations.
Under the "moving" alternative, the reporting corporation must move original documents or duplicates of the original documents to the U.S. and must do so within 60 days of the IRS request. Additional information should be provided to IRS in conjunction with the moving of records:
* Index to the requested records; * Name and address of a custodian located within the U.S. having control over the records; and * Address where the records are to be located within 60 days of the IRS's request for the records.
The reporting corporation must agree to continue to maintain these records within the U.S. throughout the record retention period. Expanded summons procedures would apply to records that have been moved to the U.S. Curiously, the record maintenance rules apply only to the "moving" alternative, not to the "delivery" alternative, but the IRS would also benefit from an index to requested records.
The Finance Committee stated that U.S. maintenance requirements could be satisfied by using duplicates as well as original documents. Documents that are required to be maintained in the U.S. must be translated into English, but translation might not be required simultaneously with the appearance of these documents in the U.S. If the material profit and loss statement rules do apply, labels and text pertaining to the statements must be in English.
Extension of Time
Production or translation of documents may have to be extended or scheduled because of the high volume of these documents or for other reasons. "High volume" is not defined by the regulations. It is not certain whether "volume" would be based on the number of pages or files, and whether the repetitive nature of the documents would have an effect in determining volume.
Production of documents may be scheduled over time so that not all of these records must be produced at once. To obtain this extension, the reporting corporation should establish why the extension is needed, based on the volume of records requested. The period for providing these documents is generally 60 days, and 120 days for material profit and loss statements, so that scheduling could be extended beyond this point.
The decision to schedule the providing of these documents may be affected by the statute of limitations or an extension. The IRS may grant an extension of time for the production and translation of the requested documents. This decision is made by the District Director. The reporting corporation must request the extension in writing and must show good cause for the extension. Extension requests should be made within 30 days of the IRS's request for the records.
Retention Period
Records must be retained as long as they may be relevant to determining the correct tax treatment of any transaction between the reporting corporation and the related party. The definition of the relevancy period is almost open-ended because of the "correct treatment" clause. In no case is the retention period less than the applicable statute of limitations. This limitation period applies to assessment and collection for the taxable year in which the transaction or item relates when the transaction affects the U.S. tax liability of the reporting corporation.
Never Less, Always More
The record retention rules will provide the IRS with considerable access to information and data. These provisions will become increasingly burdensome if implementation is delayed.
PHOTO : FIGURE 1 EXAMPLE OF REPORTING CORPORATION
The U.S. partnership engages in U.S. trade or business and these transactions take place solely with FC2 and FC3. These transactions are attributed to FC1 and the U.S. corporation. FC1 and the U.S. corporation are reporting corporations and must report their respective pro rata share of the value of the transactions, 25% to the U.S. corporation
PHOTO : FIGURE 2 EXAMPLE OF FOREIGN RELATED PARTY
The branch engages in transactions with FC1, FC2 is the reporting corporation, and FC3 is a foreign related party.
PHOTO : FIGURE 3 EXAMPLE OF NON-REPORTING CORPORATION
FC1 constructively owns its proportionate share of the stock of the U.S. corporation owned directly by FC2 and FC3. This constructive ownerhsip is 10%, 25% times 20%, or 5% for each chain, FC2 and FC3. The U.S. corporation is not a reporting corporation because no foreign shareholder owns 25% or more of the corporation. The regulations erroneously refer to "25% shareholder" rather than "25% foreign shareholder."
Robert Feinschreiber, LLM, is the Editor of the Interstate Tax Report and U.S. correspondent for Tax News Service, published by the International Bureau of Fiscal Documentation in Amsterdam. He is the author and editor of numerous books and articles on a wide variety of tax topics and has served as tax consultant to several foreign governments. Mr. Feinschreiber has taught accounting and law courses at universities and has lectured at many tax conferences.
The CPA Journal is broadly recognized as an outstanding, technical-refereed publication aimed at public practitioners, management, educators, and other accounting professionals. It is edited by CPAs for CPAs. Our goal is to provide CPAs and other accounting professionals with the information and news to enable them to be successful accountants, managers, and executives in today's practice environments.
Most of the largest companies, by revenue, are American or Japanese. In 1996, 162 of the 500 largest companies globally were from the United States, and 126 from Japan. Only a few of the largest companies are from developing countries. An exception is China, which has three entries in the top 500 list (Fortune Magazine, Top 500 and Biggest revenues and increases in revenues: http://www.fortune.com)
Measured by foreign assets, the distribution of the largest companies looks very much the same. Most of the top 100 companies with largest foreign assets are from the United States, Japan, the United Kingdom, France and Germany. In this list, Japanese companies are not as prominent.
In 1995, the list of the top 100 transnational corporations (TNCs), measured by foreign assets, included two companies from developing countries for the first time. These were Daewoo and Venezuela (oil company). Total foreign assets of the top 100 TNCs in 1995 amounted to $1.7 trillion, while total foreign sales were $2 trillion, and total employment 5,800,000.
In 1996, the total revenues of the 500 largest companies globally were $11.4 trillion, total profits were $404 billion, total assets were $33.3 trillion, and the total number of employees was 35,517,692. The top ten companies accounted for 11.7% of the total revenues of the top 500, 15% of profits, and 13.6% of employment, according to Fortune Magazine.
America was home to 31 of the 50 most profitable firms, and seven of the top ten. The most profitable, however, was Shell (the Netherlands) – with profits of $8.9 billion. Shell's profits increased by 28.7% over 1995.
In 1996, the top 500 companies did not get bigger, they got richer. Their profits increased by 25.1%, while revenues increased only by 0.5%, assets by 3.5%, and the number of employees by 1.1%.
Most of the largest American and European companies in terms of revenues are also the largest in terms of foreign assets. The largest American companies, by revenue, are GM, Ford and Exxon. By foreign assets, the largest American companies are Ford, GE, Exxon and GM (data of the United Nations Conference on Trade and Development, UNCTAD).
Shell, which is the only European company among the ten largest by revenues, also had the largest foreign assets ($79.7 billion) in 1995 (Fortune Magazine and UNCTAD).
Compared to their revenues, large Japanese companies have fairly modest foreign assets. For example, Mitsui had foreign assets of $16.6 billion, Itochu $15.1 billion, Marubeni $13.4 billion, Sumitomo $12.0 billion, and Toyota $36.0 billion in 1995 (UNCTAD).
The largest employers are United States companies. The service industries are well represented among these companies, and the largest employer is the United States Postal Service. But compared to service companies, manufacturers employ many more people abroad. According to UNCTAD, the largest employers outside their home countries in 1995 were Unilever (276,000), GM (252,699), Philips (221,000), Nestle (213,637), ABB (196,937), Siemens (162,000), BAT (155,162), PepsiCo (142,008), and McDonalds (125,000).
Largest by revenues
COMPANY
REVENUES
$ millions 1996
FOREIGN ASSETS 1995 $ billions
TOTAL ASSETS 1995
General Motors Corporation
168,369
54.1
228.0
Ford Motor Company
146,991
69.2
238.5
Mitsui & Co., Ltd.
144,943
16.6
68.5
Mitsubishi Corporation
140,204
-
79.3
Itochu Corporation
135,542
15.1
72.0
Royal Dutch/Shell Group
128,174
79.7
117.6
Marubeni Corporation
124,027
13.0
24.4
Exxon Corporation
119,434
66.7
91.3
Sumitomo Corporation
119,281
12.0
50.7
Toyota Motor Corporation
108,702
36.0
118.2
Biggest Employers
COMPANY
RANK BY REVENUES
NUMBER
OF EMPLOYEES 1996
FOREIGN
EMPLOYEES 1995
United States Postal Service
29
887,546
not available
Wal-Mart Stores, Inc.
11
675,000
not available
General Motors Corporation
1
647,000
252,699
PepsiCo, Inc.
86
486,000
142,008
RAO Gazprom
146
398,600
not available
Siemens AG
25
379,000
162,000
Ford Motor Company
2
371,702
103,334
United Parcel Service of America, Inc.
147
336,000
not available
Sears, Roebuck & Company
61
335,000
not available
Hitachi, Ltd.
16
330,152
80,000
Sources: Foreign assets and foreign employment from UNCTAD. Rest from Fortune Magazine
See also the Fortune Mazatine's lists of the largest companies in aerospace and airlines, banks, building, chemical, computer, electronics, energy, engineering, food and beverages, insurance, metal, mining and oil production, motor, telecommunications and trade ( http://www.fortune.com)
In contrast to the 1950s and 1960s, when greenfield FDI was the most popular method of market entry, cross-border mergers and acquisitions have become an increasingly important means of entering foreign markets since the mid-1980s.
According to UNCTAD, the total value of worldwide cross-border mergers and acquisitions rose in 1996, for the sixth year running. Cross-border merger and acquisition sales totaled $274.6 billion in 1996. Most of these were majority ownership sales (UNCTAD).
Most sales and purchases of companies take place within developed countries. But developed countries sell less than they buy, and the difference between the purchases and sales has grown in the 1990s. Conversely, developing countries sell more than they buy, and this difference has also grown in this decade.
In 1996, purchases of companies by developed countries accounted for $239.1 billion, and sales $186.4 billion. Corresponding figures for developing countries are $32.8 billion and $86.4 billion.
Within developed countries, the largest net purchasers are found in Western Europe. Since 1993, their purchases have increased continuously in relation to sales. In absolute terms, purchases started to increase in 1992. Main target countries are the UK and France, and main bidding countries are the UK, Germany and the Netherlands.
North America has become as popular as Western Europe for foreign predators. US companies attracted a record $68.03 billion in mergers and acquisitions from abroad in 1996, up from $61.42 billion in 1995. Foreign investors realized 16 mega-deals in the US, of which 11 were made by investors from Western European countries. (KPMG, Annual Survey, KPMG is a business advisory firm operating in 155 countries. Its name derives from the initials of its principal founders: Klynveld, Peat, Marwick and Goerdeler.)
All developing regions are primarily targets for international companies. In the Asia-Pacific region, which recorded $16.4 billion in deals in the first half of 1997, China remains a prime target for international companies. Within China, the Hong Kong Special Administrative Region exerts a powerful pull. Australia, the Phillipines and Indonesia also continued to be attractive to foreign investors. Patterns in the Asia-Pacific also reflect the fact that countries in the region purchase heavily from each other. (See KPMG Asia Pacific Survey)
Foreign deals in Central and Eastern Europe rose to $8.2 billion in the first half of 1997, up from $2.3 billion in the second half of 1996. Both Kazakhstan and Russia achieved substantial increases in the value of inward deals, with continuing interest in Poland.
Countries in Latin America are increasingly popular with foreign corporate investors, with Brazil, Venezuela, Argentina and Mexico the principal recipients of $16.5 billion in inward corporate investment in the first half of 1997. (KPMG, Annual Survey)
The average value of individual deals has risen in the 1990s. In 1996, the number of deals decreased, but their total value increased. This is in contrast to 1992-1995, when both the number and total value of transactions increased. Consequently, in 1996 the average value of deals rose more than in previous years. Average value was $37 million in 1995, and $45 million in 1996. Over the period 1990-1996, the average was $34 million.
The average purchase value curves of the United States and Western Europe are almost the same as the worldwide curve. This is natural, because these regions are the major purchasers. The Western European curve is not presented in the accompanying graph, because it would obstruct the "all countries" and United States curves. (See tables on cross-border merger and acquisition purchases in Asia Pacific countries, Latin American countries, Central and Eastern European countries, North American countries and Western European countries)
Transactions are largest in the energy sector. In 1996, the average value of cross-border deals in the production and distribution of energy was $175 million, and $98 million in the extraction of mineral oil and natural gas. The third largest average value was in postal services and telecommunications.
In their purchases, North American and Western European companies concentrated on different industries in 1996. North America was the largest purchaser of energy companies ($14.43 billion), while Western Europe is the largest purchaser of postal and telecommunications companies ($10.43 billion). (See table on cross-border merger and acquisition purchases by industry, 1996)
Average transaction values continued to increase in the first half of 1997. The value of worldwide cross-border mergers and acquisitions in this period was $130.1 billion, compared with $155 billion in the second half of 1996. However, the total number of deals continued to decline, falling from 3,100 in the first half of 1996, to 2,800 in the second half of 1996, and to 2,400 in the first half of 1997. Clearly, the average value of cross-border investments has risen significantly. (See KPMG Annual Surveys)
Intra-firm trade plays a critical role in the operations of multinational companies. It may help an MNC to reduce costs, such as the distribution of goods or acquisition of inputs abroad, or it may help integrate production processes on a global scale. Intra-firm trade may respond differently to changes in economic conditions than trade between unrelated parties. For example, it may – at least in the short term – be more insulated from competitive forces in certain markets, or from overall changes in prices, exchange rates, or general economic conditions. Furthermore, prices that govern intra-firm trade – often termed "transfer prices" – may have their own unique characteristics and determinants.
Statistics on intra-firm trade are largely missing. An exception is the United States, which is the home country of most of the world's largest multinationals. The Bureau of Economic Analysis (BEA) has detailed statistics on US multinationals' operations and on foreign multinationals' operations in the US, including intra-firm trade.
Although fluctuating moderately during the past two decades, the share of intra-firm trade – both by United States MNCs and by foreign MNCs – in US exports and imports of goods have changed very little. For both exports and imports, intra-firm trade has mainly consisted of shipments from parents to their affiliates, rather than shipments from affiliates to their parent companies. This trend is for both US and foreign multinationals. (Bureau of Economic Analyses (BEA), United States Intra-Firm Trade in Goods)
The proportion in total imports of goods to the United States that is accounted for by intra-firm imports of US multinationals has consistently been smaller than the corresponding share of exports. Intra-firm exports of United States MNCs have accounted for 21-26% of total United States exports of goods, while imports have accounted for 15-18%.
US intra-firm exports of foreign MNCs have accounted for about 10% of total US goods exports since 1977; this share has fluctuated between 7% and 12%. US intra-firm imports of foreign MNCs have accounted for a much larger share of total United States goods imports since 1977 – about 20% or more. The share of imports increased substantially in 1984-1990, from 21% to 28%. Like exports, a very large proportion of the US intra-firm imports of foreign MNCs has been accounted for by Japanese-owned affiliates.
In 1995, trade associated with US multinational corporations – trade involving United States parents, their foreign affiliates, or both – accounted for 62% of all US exports of goods and for 39% of all US imports of goods. A substantial share of the remaining US exports and imports of goods is associated with affiliates of foreign companies in the United States. In 1995, 23% of US exports of goods and 34% of US imports of goods were associated with such affiliates. (BEA, United States Multinational's Operations in 1995)
The share in total US exports and imports accounted for by multinationals – both associated and intra-firm trade – has changed very little. Associated exports of MNCs declined from 77% in 1982 to 62% in 1995. Associated imports declined from 50% in 1982 to 39% in 1995.
The share of intra-MNC-trade as a total of MNC trade is massive, both in exports and imports. Units of multinational corporations buy from each other almost as much as they buy from outside sources.
Of the $363 billion in exports of goods associated with US multinational corporations, 41% represented trade between US parents and their foreign affiliates (intra-MNC trade), while 59% represented trade with other parties. Of the $213 billion in trade with other parties, 88% were exports shipped by US multinationals to foreigners other than their foreign affiliates, and 12% were exports shipped to foreign affiliates by entities in the US other than their parent organizations.
Of the $288 billion in imports of goods associated with US multinational corporations, 44% represented intra-firm trade, and 56% represented MNC trade with other parties. Of the $163 billion in trade with other parties, 83% were imports shipped to US multinationals by foreigners other than their foreign affiliates, and 17% were imports shipped by foreign affiliates to entities in the US other than their parent organizations.
The intra-firm trading patterns of US and of foreign MNCs in the United States are fundamentally different in terms of form and industry composition. The intra-firm trade of US multinationals reflects an international division of manufacturing production between affiliated parts of the MNC. For both exports and imports, most of this trade is between United States manufacturing parents and their foreign manufacturing affiliates. The intra-firm exports to these manufacturing affiliates have mainly consisted of materials and components for further processing or assembly. (Data on the intended use of imports into the United States from these foreign affiliates are not available.)
In contrast, the intra-firm trade in the United States of foreign MNCs is largely connected with distribution and marketing activities. For both exports and imports, US wholesale trade affiliates account for most of this trade. Imports by these affiliates from their foreign parent organizations consist almost exclusively of finished goods for resale. (Data on the intended use of exports by these affiliates are not available.) (BEA, United States Intrafirm Trade in Goods)
In 1992, the share of intra-firm exports in overall US exports varied widely according to country of destination. For example, among the top six US export markets – Canada, Japan, Mexico, the United Kingdom, Germany, and "Taiwan, China" – the intra-firm share ranged from 70% for Japan to 12% for "Taiwan, China". In addition, the proportion of intra-firm trade was particularly high for Switzerland (74%) and Russia (64%). For 24 of 62 countries included in available statistical information, the share of intra-firm exports was less than 10%. (BEA, United States Intrafirm Trade in Goods)
The share of intra-firm trade in overall US imports also varied substantially by country. Among the top six source countries for imports into the United States – Canada, Japan, Mexico, Germany, China, and "Taiwan, China" – the share ranged from 71% for Japan to less than 10% for China and "Taiwan, China". For Germany, the share was 61%. In addition to Japan and Germany, intra-firm trade accounted for a majority of United States imports from seven other countries; the share was highest for imports from Switzerland (76%). In addition to China and "Taiwan, China", intra-firm trade accounted for less than 10% of United States imports from 19 other countries. (BEA, United States Intrafirm Trade in Goods)
Intra-firm transactions – particularly shipments flowing from parent companies to their affiliates – tend to be relatively more important in US trade with higher-income countries. Among 59 major US trading partners, there is a pronounced tendency for the proportion both of intra-firm exports of US MNCs in total exports and of intra-firm imports of foreign MNCs in total imports to increase with the per-capita gross national product (GNP) of the trading partner. The average share of US exports accounted for by intra-firm trade of US MNCs increases from 4% for the 11 trading partners with per-capita GNP of less than $1,000, to 23% for the 14 trading partners with per-capita GNP of $20,000 or more. The average share of US imports accounted for by intra-firm trade increases from less than 3% for the 11 countries with the lowest per-capita GNP, to 35% for the 14 countries with the highest per-capita GNP. (BEA, United States Intrafirm Trade in Goods)
Cross-border agreements between firms based in different countries have become increasingly important complements to traditional FDI activities, with the range of such agreements growing ever wider. They include arrangements for joint ventures, licensing, subcontracting, franchising, marketing, manufacturing, research and development (R&D), and exploration agreements. These may be equity-based, or may entail no equity participation. (UNCTAD, World Investment Report 1997.)
The number of these agreements (apart from strategic R&D partnerships) increased from 1,760 in 1990 to 4,600 in 1995. Most cross-border inter-firm agreements concluded during the period 1990-1995 involved firms from the three major industrial centres: firms from European Union countries participated in 40% of such agreements, Japanese firms in 38%, and United States firms in 80%. (UNCTAD, World Investment Report 1997.)
Developing countries are becoming increasingly involved in cross-border agreements, especially in those that are equity based. The number of new cross-border inter-firm agreements with developing country participation increased from around 440 in 1990 to some 2,120 in 1994, but fell to 560 in 1995. Their share in the total number of cross-border inter-firm agreements increased on average from 27% in 1990-1992 to 35% in 1993-1995. In contrast, the corresponding share of Central and Eastern European participation in cross-border agreements was halved over the same time frame. (UNCTAD, World Investment Report 1997.)
The number of cross-border strategic R&D partnerships increased from nearly 280 in 1991 to 430 in 1993. The upward trend continued in 1994, but faltered in 1995. Most cross-border non-equity strategic R&D partnerships have been between firms from developed countries. In 1995, out of the total number of such agreements for which the countries of the participating firms are known, 86% had at least one United States partner, 42% had at least one partner from the European Union, and 31% had at least one Japanese partner. However, developing-country firms are also becoming more involved in these partnerships. The participation of developing countries in the total number increased from 3% in 1989 to 13% in 1995. (UNCTAD, World Investment Report 1997.)
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Jane Smith, Director of Administration and Finance Jane has an extensive background in banking, administration and management. This experience is supplemented by broad skills in customer relationship and...
Foreign Ownership in the United States [3.4.2]
Three main government entities are responsible for assessing foreign ownership in the telecommunications sector in the United States.
Federal Communications Commission
The Federal Communications Commission (FCC) reviews initial authorizations and transfers of control of telecommunications licences.[1] Section 310 of the Communications Act of 1934,[2] as amended by the Telecommunications Act of 1996,[3] imposes foreign ownership restrictions on U.S. broadcast, common carrier, or aeronautical radio station licensees.[4] Section 310 covers foreign ownership restrictions applicable to FCC licences, and Section 310(b)(4) in particular is implicated in the majority of cases where foreign ownership is an issue.[5] In addition, applications from companies with foreign ownership[6] or a transfer of control or assignment application in which foreign ownership is an issue may be scrutinized more closely by the Executive Branch, including the Department of Justice, the Federal Bureau of Investigation, and the Department of Homeland Security, for potential national security, law enforcement and public safety issues.[7] The Departments of Justice and Homeland Security, and the Federal Bureau of Investigation typically intervene in the FCC review to ensure that foreign investment in U.S. telecommunications assets does not impair U.S. law enforcement, national security or infrastructure protection interests.
In the past few years, the U.S. Department of Homeland Security's focus on infrastructure protection has increased the scope of the voluntary security agreements that the Department of Justice, Federal Bureau of Investigation, and Department of Homeland Security have negotiated. It is much more frequent that companies are required to enter into voluntary security agreements with these agencies before obtaining approval for their licence applications or obtaining approval under the CFIUS process discussed below. The security agreements are intended to facilitate U.S. law enforcement for undertaking surveillance activities, preventing foreign government surveillance activities, and prevent improper foreign access to U.S. telecommunications networks. To date, voluntary security agreements have been entered into by such companies as British Telecommunications,[8] Voicestream/T-Mobile (owned by Deutsche Telekom),[9] and Videsh Sanchar Nigam Limited of India.[10]
Department of Justice
In addition to the FCC, the Department of Justice reviews proposed purchases for antitrust implications.[11] In the United States , any transaction, meeting a certain threshold is subject to antitrust review under the Hart-Scott-Rodino Act, regardless of whether or not it involves foreign investment.
U.S. Department of Treasury's Committee on Foreign Investment in the United States (CFIUS)
CFIUS[12] reviews the national security implications of foreign acquisitions of U.S. companies.[13] CFIUS is an interagency group composed of major Executive Branch departments, agencies and offices, including the Departments of Defense, State, Treasury, Commerce and Homeland Security, which reviews foreign investment submissions under the authority of the Exon-Florio Amendment to the Defense Production Act of 1950.[14] This act grants the President authority to suspend or prohibit any foreign acquisition, merger or takeover of a U.S. corporation that is determined to threaten the national security of the United States. The CFIUS process generally is initiated by a voluntary notice filed by the parties to an acquisition, merger or takeover.
The President can only exercise his authority under the Exon-Florio provision if he finds that: (a) credible evidence that the foreign entity exercising control might take action that threatens national security, and (b) the provisions of law, other than the International Emergency Economic Powers Act do not provide adequate and appropriate authority to protect national security. In addition, investigation under Exon-Florio is mandatory where: (a) the acquirer is controlled by or acting on behalf for a foreign government; and (b) the acquisition could result in control of a person engaged in interstate commerce in the United States that could affect national security in the United States.
Although ultimately approved, a number of ICT transactions have undergone CFIUS review in the past few years, including: the NTT Communications purchase of Verio;[15] the transaction between IBM and Lenovo, one of the leading IT companies in China;[16] and the sale of Global Crossing to Hutchinson.[17] Since 11 September 2001, the CFIUS review process has intensified due to heightened national security concerns. Generally, rejection of the transaction is unlikely but the U.S. may require certain restructuring measures to be undertaken before they will approve the transaction.
ENDNOTES
[1] The FCC's International Bureau published a set of advisory guidelines explaining how the FCC analyzes foreign ownership issues under Section 310 of the Communications Act of 1934 as amended. FCC International Bureau, Foreign Ownership Guidelines for FCC Common Carrier and Aeronautical Radio Licences , November 17, 2004 [ hereinafter FCC Guidelines].
[4] 47 U.S.C § 153(42) defines a “station licence” as “that instrument of authorization required by the Act or the rules and regulations of the Commission made pursuant to the Act, for the use and operation of apparatus for transmission of energy, or communications, or signals by radio by whatever name the instrument may be designated by the Commission.”
[5] Section 310(b)(3) is non-discretionary, and prohibits foreign governments, individuals and corporations from directly owning more than 20% of the stock of a broadcast, common carrier, or aeronautical radio station licensee. 47 U.S.C. §310(b)(3). According to FCC Guidelines, this section also applies in situations where a foreign entity holds equity or voting interests in a licensee through an intervening domestically organized holding company that itself holds non-controlling interests in the licensee. Section 310(b)(4) establishes a 25% benchmark for indirect investment by foreign individuals, corporations and governments in entities that control a broadcast, common carrier, or aeronautical radio station licence, and also gives the FCC discretion to allow higher levels of foreign ownership unless it finds that such ownership is inconsistent with the public interest. 47 U.S.C. §310(b)(4). According to the FCC Guidelines, this section also applies in situations where the foreign entity holds equity or voting interests in a domestically organized holding company that directly or indirectly controls the licensee. The FCC also gives preference to foreign investments by WTO Member countries, who are treated with a refutable presumption that foreign investment from WTO Member countries does not pose competitive concerns in the U.S. market. See FCC Guidelines, at 10-11.
[7]In Re the Matter of Rules and Policies on Foreign Participation in the U.S. Telecommunications Market , IB Docket No. 97-142, September 12, 2000.
[8]See British Telecommunications commitment letter regarding the acquisition of Infonet Services Corporation, submitted to the U.S. Department of Justice, the U.S. Department of Homeland Security, and the Federal Bureau of Investigation, January 12, 2005, available at http://hraunfoss.fcc.gov/edocs_public/attachmatch/DA-05-387A2.pdf .
[9]See Agreement regarding the transfer of licences held by Voicestream Wireless Corporation and Omnipoint Corporation to Voicestream Wireless Holding Corporation signed between Voicestream Wireless Corporation and Voicestream Wireless Holding Corporation (collectively “Voicestream”) and the U.S. Department of Justice and the Federal Bureau of Investigation, January 26, 2000, available at http://www.fcc.gov/Bureaus/Wireless/Orders/2000/fc00053a.pdf .
[10]See Agreement regarding the transfer of Tyco cable landing licences signed between VSNL America Inc., VSNL US , and Videsh Sanchar Nigam Limited (VSNL) and the U.S. Department of Homeland Security, U.S. Department of Justice and Federal Bureau of Investigation, April 11, 2005, available at http://svartifoss2.fcc.gov/servlet/ib.page.FetchAttachment?attachment_key=429057 .
[11] The Hart-Scott-Rodino Antitrust Improvements Act of 1976, codified in 15 U.S.C. §18a, requires the parties to certain qualifying acquisitions of any voting securities or assets of the acquired party to notify the U.S. Federal Trade Commission and the Department of Justice of the transaction and await the expiration of a mandatory waiting period prior to the closing, which is generally 30 days or 15 days in case of a cash tender offer. For an overview of this review, see Owen D. Kurtin & Beth Simone Noveck, The Regulatory Context of Acquisitions and Investment in the U.S. Telecommunications , International Journal of Communications Law and Policy, Issue 4, Winter 1999/2000.
[12]See James A. Lewis. CFIUS is an interagency body chaired by the Treasury Department. Some of the agencies that participate in CFIUS include the Department of Homeland Security, the Departments of State, Defense, Justice and Commerce, and the FBI. After a company's filing notification of a transaction with CFIUS, it has one month to decide whether or not to investigate the proposed sale.
[13] The CFIUS conducts the Exon-Florio review under delegated executive authority. The intent of Exon-Florio is not to discourage foreign direct investment generally, but to provide a mechanism to review and restrict foreign direct investment that threatens the national security. For a detailed description of the CFIUS procedure, see United States Department of the Treasury website, at http://www.treas.gov/offices/international-affairs/exon-florio/ .
[14] Section 721 of Pub. L. 100-418, 102 Stat. 1107, made permanent law by section 8 of Pub. L. 102-99, 105 Stat. 487 (50 U.S.C §2170), and amended by section 837 of the National Defense Authorization Act for Fiscal Year 1993, Pub. L. 102-484, 106 Stat. 2315, 2463.
Asia
Asia's FDI inflows reached $155.5 billion, an unprecedented $48.6 billion increase over the year before. Asia is attracting nearly one in four global FDI dollars compared to only one in 10 in 2000. The top five host economies—China, Hong Kong, Singapore, South Korea and India—account for 80 percent of the flows to the region. Although greenfield investments continue to be the dominant form of FDI to the region, mergers and acquisitions are playing a more important role. In 2004, cross-border M&A deals amounted to $25 billion—up from $22 billion in 2003—and were primarily concentrated in China, South Korea and Hong Kong.
China and India are considered the world's 1st and 2nd most attractive FDI locations globally. China held the top spot for the forth year in a row and India rose from 3rd to 2nd place, surpassing the United States. Hong Kong and South Korea dipped slightly from 8th to 10th and 21st to 23rd, respectively. Singapore and Thailand maintained their positions at 18th and 20th place.
Despite an additional 1.5 billion people in the developing world (from 1981 to 2001), the number of extremely poor people in these countries declined by more than 375 million—a feat unimaginable two decades ago and largely the result of progress in China and, to an extent, India. China and India are attractive to CEOs worldwide due to their strong growth rates, growing consumer populations, and low-cost but highly educated labor pools. Pro-FDI reforms and accelerated integration into the worldwide IT network have made both countries more attractive to investors.
China. China maintains its lead in the Index for the fourth consecutive year. China attracted $60.6 billion in FDI in 2004, the highest among all developing economies. Although total inflows to China are much lower than to the United States, China has a much higher number of greenfield FDI projects. The United States had 578 such projects in 2004, while China had 1,529.
The Chinese economy continues its robust development, growing by 9.5 percent in the second quarter of 2005. Total growth in 2005 exceeded expectations at nearly 10 percent, with robust growth expected into 2006.
Once again, China is the top FDI location for first-time investors, with more than half (55 percent) of investors expected to make first-time investments there over the next three years. This is significantly higher than the 43 percent of investors that expected to invest in China for the first time in 2004. One in five FDI dollars for first-time investments will be committed to the Chinese market. China has successfully overcome the perceived risk associated with first-time market entry, which is typically the biggest barrier to generating new FDI.
Implementation of World Trade Organization (WTO) requirements is fueling investor interest, as is continued liberalization and deregulation in banking, insurance, telecommunications, and wholesale and retail segments. Policy changes to increase foreign ownership and reduce or eliminate geographic restrictions are also galvanizing FDI confidence.
Investor interest in the Chinese financial sector is especially high. Despite concerns over non-performing loans and poor transparency, China ranks 1st among banking, insurance, real estate and holding companies. The Chinese government is seeking foreign investments to help restructure and modernize the country's financial system. Under the WTO guidelines, China has to liberalize its financial services sector by the end of 2006.
Despite strong interest from financial services investors, most Chinese banks suffer from large amounts of non-performing loans, which is an estimated 30 percent of total loans, and still do not have risk-evaluation practices. Some banks are technically insolvent, but are kept afloat by government bailouts and individuals who view them as safe havens for their savings.
The largest cross-border mergers and acquisitions were in the financial services sector as China focused on restructuring and publicly listing the four main state banks. In 2005, the China Construction Bank received a $3 billion commitment from Bank of America (U.S.) and its initial public offering in Hong Kong generated $8 billion—the world's largest IPO in four years.
Investors in the food, tobacco, textile and apparel industries are optimistic about China. More than 61 percent of investors express a more positive outlook on China. 10
Investments by private equity and venture capital funds have become important sources of investment in China. The Texas Pacific Group (U.S.), General Atlantic LLC (U.S.), and
Newbridge Capital LLC (U.S.) together invested $350 million in Lenovo's acquisition of IBM's PC business. Also, the Carlyle Group (U.S.) invested $400 million in China Pacific Life Insurance.
China maintains its position as the number one destination for manufacturing and assembly, but the profit cycle could be winding down. China's manufacturing base has developed over
the years in large part by foreign multinational companies; two-thirds of China's manufacturing exports are from foreign companies. However, after three years of strong growth, U.S. foreign affiliates in China saw their earnings decline in the first half of 2005 with a 9 percent year-on-year decline.
Labor skills and enforcement of intellectual property rights remain weak. China has nearly the highest software piracy rate in the world (92 percent according to Business Software Alliance), while Zimbabwe and Indonesia offer more software protection. China continues to be hampered by poor English skills and a lack of managerial talent. With more companies moving into the market, competition will make it even more difficult to recruit high-quality staff.
India. India replaces the United States as the 2nd most attractive FDI location, up from 3rd place in 2004 and reaching its highest ranking ever. While India's IT and software industry has made it the darling in the global business community over the past few years, global investor interest in other areas is just now catching up.
FDI flows to India surpassed the $5 billion mark for the first time in 2004, reaching $5.3 billion. India's FDI flows continue to be skill intensive, and concentrated in information and technology areas. Foreign corporate participation in the Indian economy typically occurs in the form of licensing and service contracts because of FDI restrictions and the increased capabilities of local subcontractors. This means companies can offshore their back-office IT operations to India without committing FDI.
China and India use different FDI development paths. China attracts capital-intensive industries via an export-manufacturing framework that uses special economic zones. India favors an import-substitution system to attract more technology-oriented FDI. India's previously restrictive FDI regime limits foreign participation to mostly licensing and other contractual agreements—not FDI. This may explain why foreign companies that outsource to India prefer to purchase the services of a third-party provider.
The Indian government is reforming the Foreign Investment Promotion Board, and has established the Indian Investment Commission to act as a one-stop shop between the investor and the bureaucracy. Also, India has raised FDI caps in the telecom, aviation, banking, petroleum and media sectors.
Yet opposition from coalition partners may limit government reforms. The 2004 elections gave no party a clear majority, leading to the formation of a coalition government that has complicated India's reform process. India requires $150 billion worth of investments to upgrade the country's weak infrastructure over the next 10 years. The government is considering sweeping liberalization to expedite the FDI project review process and eliminate FDI restrictions across a broad range of sectors, including airports, oil, gas and natural resources.
Although more investors view India as an attractive destination, bureaucracy, perceived corruption and a poor infrastructure may cloud efforts to attract FDI. Among the most recent troubles: Telecom Malaysia and Singapore Technologies' bid to buy Idea Cellular was abandoned when it ran into regulatory problems. Singapore's Changi airport withdrew its bid for the Delhi
and Mumbai airports because of constraints on foreign investors.
India has signed an increased economic cooperation agreement with Singapore. This is the first Indian bilateral agreement that includes services and measures to avoid double taxation—and it will likely lead to increased FDI inflows from Singapore. Specifically, the agreement allows Temasek Corporation and Government of Singapore Investment Corporation to buy 10 percent more equity in Indian companies than other investors. Also, several Singapore banks will be granted licenses to set up branches in India over the next four years.
Financial services investors upgrade India from 4th to 2nd most attractive FDI location. The emergence of local players, ICICI Bank and HDFC Bank, along with foreign investors, has helped restructure India's underdeveloped financial sector and spur competition. Deutsche Bank (Germany) is launching a range of savings, investment and loan products as well as investment
and financial planning services in seven major Indian cities.
Telecom and utilities investors rank India their 3rd most attractive destination. One reason for the interest is the relaxation of ownership restrictions. In October 2005, the Indian government raised foreign ownership levels to 74 percent (from 49 percent), a move that will add fuel to India's booming IT and software industry. According to NASSCOM, the Indian IT software and services exports have grown from $5.3 billion in 2000 to $16.5 billion in 2005.
Also, estimates suggest that India has the world's fastest-growing mobile phone market, growing at 35 percent per year until 2006. Immediately following the relaxation of restrictions, Vodafone Group (U.K.) acquired a 10 percent stake in Bharti Tele-Ventures, India's largest mobile phone operator.
Investors in the heavy and light manufacturing sectors are optimistic about India. The country's largest FDI commitment was won when Pohang Iron & Steel (South Korea) confirmed a $12 billion deal to build a steel plant and develop iron ore in Orissa. The success of this deal will be a test case for future large-scale, long-term foreign investment in India. The government has established special economic zones to encourage a competitive, export-oriented manufacturing sector.
In 2004, India had the fastest growing large-passenger-car market in the world, which will likely continue to expand given the country's low loan rates, rising incomes and flourishing middle class.
FDI in the retail sector continues to be the subject of heated political debates. Almost half of investors have a positive outlook on India's wholesale and retail sector, despite strict regulations. For example, while franchise operations are allowed, foreign direct ownership is banned.
Companies proposing to be involved in an acquisition by a foreign firm are supposed to voluntarily notify CFIUS, but CFIUS can review transactions that are not voluntarily submitted. CFIUS reviews begin with a 30-day decision to authorize a transaction or begin a statutory investigation. If the latter is chosen, the committee has another 45 days to decide whether to permit the acquisition or order divestment. Most transactions submitted to CFIUS are approved without the statutory investigation.[1]
CFIUS has looked at the "restrictions on sale of advanced computers to any of a long list of foreign recipients, ranging from China to Iran."[2] CFIUS reviews even deals with firms from U.S. allies, such as BAE Systems' early-2005 acquisition of United Defense. This and the vast majority of transactions submitted to CFIUS are approved without difficulty. But at least one deal has been called off when CFIUS began to take a closer look.[3]
Some important cases include:
The 2005 acquisition by Lenovo, the largest personal computer company in China, of IBM's personal computer and laptop unit
In February 2006, Richard Perle gave more insight into CFIUS when he related to CBS News his experience on the panel during the Reagan administration, "The committee almost never met, and when it deliberated it was usually at a fairly low bureaucratic level." He also added, "I think it's a bit of a joke if we were serious about scrutinizing foreign ownership and foreign control, particularly since 9/11."[4]
gave more insight into CFIUS when he related to his experience on the panel during the Reagan administration, "The committee almost never met, and when it deliberated it was usually at a fairly low bureaucratic level." He also added, "I think it's a bit of a joke if we were serious about scrutinizing foreign ownership and foreign control, particularly since 9/11."
Others emphasize the crucial role that foreign direct investment plays in the U.S. economy, and the discouraging effect that heightened scrutiny and protectionism can cause. Foreign investors in the United States, much like U.S. investors elsewhere, bring expertise and infusions of capital into often-struggling sectors of the U.S. economy. In a February 2006 interview with the New York Times, another former Reagan administration official, Clyde V. Prestowitz Jr., noted that the United States "need[s] a net inflow of capital of $3 billion a day to keep the economy afloat.... Yet all of the body language here is 'go away.'"[5] And, as Secretary Powell once remarked, "money, capital, is a coward; it will go nowhere where it is put in fear."[6]
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In 1995, trade associated with US multinational corporations – trade involving United States parents, their foreign affiliates, or both – accounted for 62% of all US exports of goods and for 39% of all US imports of goods. A substantial share of the remaining US exports and imports of goods is associated with affiliates of foreign companies in the United States. In 1995, 23% of US exports of goods and 34% of US imports of goods were associated with such affiliates. (
