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Case Study II Individual nations may have both written and unwritten policies regarding the regulation of investment in the country by foreign...
Case Study II
Individual nations may have both written and unwritten policies regarding the regulation of investment in the country by foreign businesses. A foreign investor, first of all, must show that its proposed investment meets the criteria of the host state's foreign investment law. That does not, however, end the process of qualifying to make a foreign investment in some countries. Some countries also require that the foreign investor comply with the unstated rules, typically referred to as the operational investment code of the government authority that regulates investment in that nation.
Lilly and Daisy have developed a strategic business plan for MegaRex Drugs Corporation to locate production facilities; distribution networks; and delivery assistance for the manufacture, distribution, and delivery of generic polio treatment drugs in two countries.
As part of their plan is a need to appoint a US citizen to manage the overseas operation in each of the countries. Their offer includes (1) during 2016 a base salary of USD 100,000 all of which is foreign earned income with a qualified foreign housing costs in 2016 equal to USD 35,000; and (2) during 2017 a base salary of USD 110,000 all of which is foreign earned income with a qualified foreign housing costs in 2017 equal to USD 40,000 plus early in 2017 each foreign appointee will receive a bonus of USD 12,000 related to their performance in 2014. Lilly and Daisy are afraid that they will have difficulties attracting people to consider for the positions because of the unfamiliar conditions of these foreign countries. However, Lilly and Daisy believe that they can advertize these positions by emphasizing the potential tax benefit from the US government as a US citizens earning their income entirely abroad after a colleague told them about it (The colleague said that the US citizens do not have to pay any income taxes in the US due to US law based on the Foreign Earned Income Exclusion (FEIE) and Foreign Housing Exclusion and Deduction). However, Lilly and Daisy have some reservations about these alleged tax benefits, even though they are not tax experts, they believe based on their knowledge all US citizens must pay taxes on all their income wherever is earned as provided by the US constitution and other US law: The Sixteenth Amendment to the US Constitution, ratified in 1913, provides that "[t]he Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration." The Sixteenth Amendment has been reviewed by the US Supreme Court and upheld in the case Brushaber v. Union Pacific Railroad Co., 240 U.S. 1 (1916). Further, Section 61(a) of the Internal Revenue Code defines gross income as income from whatever source derived, including (but not limited to) "compensation for services, including fees, commissions, fringe benefits, and similar items." I.R.C. § 61(a)(1).
Before moving forward with the plan, they have asked you, their expert business consulting team, to advise them on the regulatory climate for foreign investment in each of these countries. Lilly and Daisy intend to use your consulting team's material at a board of directors' meeting. They have therefore asked your team to prepare a script (a one to three page report) describing foreign investment regulation in each of those countries. As part of your script you should provide (1) an evaluation whether each country's regulatory approach poses any particular challenge(s) for MegaRex Drugs Corporation's business plan in that country; and (2) a brief proposal of a specific action plan for addressing each challenge so that MegaRex Drugs Corporation's investment can go forward in an environment where the risks posed by the particular challenges have been minimized. Also, you should provide a brief summary whether Lilly and Daisy should move forward with the proposed advertisement for the foreign positions with the income tax benefits.
Choose two from the following list of topics to address in your discussion of each country's regulation of foreign investment and the effect on MegaRex Drugs Corporation's business plan. Your team may elect to choose different
combinations of two topics among the two countries your team is evaluating. The same two topics need not be evaluated for each country:
openness to foreign investment conversion and transfer policies expropriation and compensation dispute settlement performance requirements and incentives right to private ownership and establishment protection of property rights transparency of regulatory system foreign trade zones/free ports
Lilly and Daisy have requested that you support the script with at least 6 PowerPoint slides (approximately three per host nation) but not to exceed 10 PowerPoint slides. Your team will be graded on the quality of your script notes (report) and PowerPoint creation/presentation. The oral presentation should not exceed 10 minutes.