Chapter 15 • International aspects of business finance
generated. There are, however, aspects of international investments that need special
attention. These are now considered.Estimating exchange rates
Where some of the cash flows associated with the project will be in a foreign currency,
appraisal requires that all the relevant cash flows be expressed in a common currency,
normally the business’s home currency, so that an appraisal can be undertaken. This
requires not just that future cash flows are estimated, but also that they are translated
into the home currency using an estimate of the exchange rate prevailing at the point
in the future when the cash flows will occur. In theory, the purchasing power parity
(PPP) principle, discussed earlier in the chapter, should ensure that the exchange
rate is not an issue. This is because any shift in exchange rates should be compensated
for by movements in purchasing power of the two currencies concerned. We saw
earlier in this chapter, however, that PPP does not strictly hold in the real world.
Given the difficulties of estimating future exchange rates, it might be reasonable
to assume PPP unless there is good reason to believe otherwise in the particular
circumstances.Taxation
Almost certainly there will be ramifications of foreign taxation where profits are gen-
erated outside the home country. There may well be taxes on other aspects as well as
profit. There may, for example, be taxes on the occupation of property, as is the case
in the UK.
In the case of taxes on profits, there may well be a double-taxation agreement with
the home country, where, in effect, tax is paid at the higher of the home country’s and
the relevant foreign country’s rate. For UK businesses, since UK corporation tax rates
are low by international standards, this may mean higher tax than on a similar profit
generated in the UK.
Obviously the appraisal of the investment must take account of the tax aspects.Restriction of remittances
Some countries restrict the amount of profit that can be repatriated by foreign
investors. This may be because converting funds to another currency weakens the first
currency – something that the government of the foreign country concerned may be
eager to avoid. Also, funds that cannot be remitted abroad can only be reinvested in
the country where they were generated, an action likely to be beneficial to the country
concerned. Whatever the reason for the restriction, it is a factor that needs to be taken
into account.Environmental factors
There may be particular factors that affect a particular foreign location and which need
investigation. These would include such matters as environmental constraints (for
example, anti-pollution laws) and ethical constraints (for example, resistance by the
population to working in a particular way or to buying particular products). These
need to be looked at carefully.