Often large companies with many subsidiaries find it necessary to engage in intercorporate debt transactions. This occurs because one affiliate may be able to borrow at a more favorable rate than another, or because lending to an affiliate may lower the overall cost of capital. Another reason for intercompany transfers may be to take advantage of lower tax rates in an affiliates location. (Beuttner and Wamser, 2007)

Generally speaking, there are two ways in which debt can be transferred between affiliated companies: adirect transfer, or anindirect transfer. Direct transfers occur when one affiliate loans funds directly to another affiliate. An indirect transfer occurs when an affiliate issues a debt instrument (such as a note or a bond) to an unrelated third-party, then an affiliated company with the debt issuer subsequently purchases the debt instrument. For example, Company 1 issues a bond to Sunshine Financial. Subsequently, Company 2, an affiliate of Company 1 purchases the bond from Sunshine.

Direct loans used to transfer funds between affiliated companies pose relatively few problems with consolidation. Since no money is owed to an outside party, all the effects of this type of intercompany indebtedness are eliminated in the consolidation process. A company cannot report an investment in its own bonds, or a bond liability to itself. Therefore all account balances associated with the transfer are adjusted in the consolidation process in conceptually the same manner as other intercompany transfers.

Indirect loans, on the other hand, can be more complicated. From the viewpoint of the consolidated entity, the purchase of an affiliates debt instrument from the unrelated third-party effectively retires the debt. If the debt was purchased at book value, the eliminating entries are the same as for direct debt transfers. However, if the debt is purchased above or below book value, then the resultant gain or loss is reported in the consolidated income statements. Additionally, the consolidated balance sheet no longer shows a payable or an investment since the debt is no longer considered outstanding.

Instructions:

For this discussion, please research and read the following article in theECPI Online Library:

Garlock, David C.; Khalaf, Amin N.JournalofTaxationofFinancialProducts. 2014, Vol. 12 Issue 2, p23-52. 30p.

Discussthe following information in your initial post:

• • Explain how Multinational Corporations (MNCs) utilize Intercorporate Debt transfers to shift profits.

What effect do these transactions have on the Consolidated Statements? Do you believe that this practice should be allowed? Howcouldthispracticeberegulated?Only needs to be a paragraph or two