FOREX MARKET & International Taxation

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Evolution «. History«. ë Different Countries ± Different Langages ë Civilisation / Culture / Practices ë Different Governments / Governance / Rules ë Trade / Industries : Evolved / Grew

Evolution «. History«. ë _arter system ë Common Mode of Exchange ë Evolution of Money ë Convenience : Leather / Metal / Grains / _eads ë Different Monies / Values ë International Trade / Travelling ë Colonisation / Invasion : Mughals / East India Co

International Monetary System ë _imetallism : _efore 1875 ë Classical Gold Standard : 1875 - 1914 ë Interwar Period : 1915 - 1944 ë _retton Woods System : 1945 - 1972 ë Flexible Exchange Rate Regime : Since 1973

International Monetary System _imetallism : _efore 1875 ë Initially, only coins : Gold & Silver ë Value : _ased upon Gold / Silver Content in the Coins ë _ritain : Gold ; France : _imetallic ; Germany : Silver ë _ritish Pound to German Mark : Through French Franc ë Germany, Holland, China & India : Only Silver ë Other Metals were also used, in other countries

International Monetary System Classic Gold Standard :1875-1914 ë Gold : Universal Fondness : Many Centuries Old ë Greek / Roman Empires and Earlier : Popular ë Even in India : Ancient Empires used Gold ë Gold Standard : Not Gold Coins : Money _acked by Gold ë France : 1850s, Germany:1875; USA : 1879; Japan : 1897

International Monetary System Classic Gold Standard :1875-1914 ë Gold alone is assured of unrestricted coinage ë Two-way Convertibility between Gold & Currency ë Value of Money : Linked to Value of Gold in the country ë Gold may be freely imported / exported ë Net Trade _alance : Settled by Gold : Specie Flow Mech. ë Exchange Rate between 2 currencies : Gold Content ë (E.g.): UK : 6 Pound / Ounce; France : 12 Francs / Ounce ë 1 Pound = 2 Francs ë During that period, Pound Sterling = $4.84 ± $4.90

Interwar Period :1915-1944 ë After WW-I : ë UK, France, Germany & Russia : Stopped Redemption ë Placed Embargo on Gold Exports ë Germany, Austria, Hungary, Poland : Hyperinflation ë Germany : Worst : 1923 : WPI : 1 Trillion Times ë Currency values not pegged to Gold : Fluctuation ë Acute Shortage of items : Devaluation : Exports.. ë Gold Standard disappeared ë 1919 : USA restored Gold Standard ëUK, Switzerland, France, Scandinavian Countries : 1928 ëMost countries kept some gold out of Currency Float ë1929 : Great Depression / Stock Market Crash : Erosion ëUK experienced huge outflow of Gold: Chronic _OP issue ë1931:UK, Canada, Sweden, Austria, Japan Got off Gold Std

Interwar Period :1915-1944 ëHuge erosion in Gold Stock across Europe ëMassive _ank Failures in the US and other countries ëFlight of Capital across borders ëHalf-hearted attempts to restore Gold Standard & Failure ëEconomic and Political Instabilities

_RETTON WOODS SYSTEM : 1945-1972 ‡ July

1944 : Reps of 44 Nations met at New Hampshire

‡ Agreement between countries : IMF formed ‡ _ritish : International Reserve Asset : µbancor¶ ‡ Americans : Currency Pool from Member Countries ‡ Suggestions from America were built into Articles of IMF ‡ All countries agreed to peg their currencies par value to USD ‡ US $ then linked to Gold Price : $ 35 = 1 Ounce of Gold ‡ Called the Gold Exchange Standard, based on Dollar ‡ When market price of Gold fell below $ 35, became an issue

_RETTON WOODS SYSTEM : 1945-1972

_RETTON WOODS SYSTEM : 1945-1972 ‡ New asset created at IMF : SDR : Special Drawing Rights ‡ SDR : Initially average of 16 currencies : World Export ‡ 1981 : 5 currencies : USD, DM, Yen, PDS, FF ‡ Currently: 4 : USD : 45%; Euro :29%; Yen : 15%; PDS:11% ‡ SDR : Portfolio of Currencies ‡ Can be an attractive denomination for International Contracts

COMPOSITION OF SDR

FLOATING EXCHANGE RATE : 1973 « ‡ Gold Rates : Widely beyond benchmark rate ‡ Higher inflation in the US - US$ un-attractive link currency ‡ Countries revalued their exchange rate with US$ ‡ European and Japanese currencies were de-linked from US$ ‡ US $, PDS, DM, Yen : Fluctuating against each other ‡ Gold ceased to be the standard for money value ‡ IMF returned half of their gold holding to member nations ‡ Central _anks of countries were authorised to intervene

Current Foreign Currency Arrangement 1. Pegged to the US Dollar :Hong Kong 2. Pegged to Euro : Estonia 3. Pegged to Other Currencies : Single / _asket ‡ Narrow Range : 1%; Malaysia / China 4. European Monetary Union - Euro 5. Limited Flexibility : Israel / Romania 6. Managed Floating : 42 Countries ‡ Govt. intervenes: Singapore / India / Thailand 7. Independent Floating : 41 Countries ‡ Market Driven : UK / Canada / Japan / Australia

EXCHANGE RATES-1999 :

FOREIGN EXCHANGE ‡ Means the money of a Foreign Country ‡ _ank _alances, Notes, Coins, Cheques, Drafts

Movement in US $

FOREIGN EXCHANGE MARKET ëThe Foreign Exchange Market : ë The physical and institutional structure through which the

money of one country is exchanged for that of another country ë The determination rate of exchange between currencies ë Is where foreign exchange transactions are physically completed

ëForeign exchange transaction : ë An agreement between a buyer and a seller ë Fixed amount of one currency will be delivered for some

other currency ë At an agreed Exchange Rate ë At a specified date

FOREX MARKET - FUNCTIONS Forex Market is the mechanism by which participants: ‡ Transfer purchasing power between countries ‡ Obtain / provide credit for international trade transactions ‡ Minimize exposure to the risks of exchange rate changes

FOREX MARKET ± PARTICIPANTS ‡ Reserve _ank of India (R_I) ‡ All Scheduled Commercial _anks (Authorised Dealers only) ‡ Corporate Treasuries ‡ Public Sector/Government ‡ Inter _ank _rokerage Houses ‡ Resident Indians ‡ Non Residents ‡ Speculators and Arbitragers

_ALANCE OF PAYMENT

_ALANCE OF PAYMENT ‡ Net _alance of All International Financial Transactions ‡ Country¶s Total Exports ± Total Imports ‡ Net µ+¶ : Favourable; µ-¶ : Un-Favourable ‡ One Country with All Other Countries ‡ µ+¶ with one country and µ-¶ with many possible ‡ Generally, world over, in US $ ‡ Imports / Exports of Goods, Services, Cross-_order Investments, _ank A/c, _onds, Stocks, Real Estate etc.

_ALANCE OF PAYMENT ‡ O
 
   
  

 

   

                ‡ Over a Certain Period of time, same as national income a/c ‡ µ+¶ : Receipts : Credits : Sales, Financial Claims, Assets ‡ µ-¶ : Payments : Debits : Purchase, Obligations ‡ One Country with All Other Countries ‡ µ+¶ with one country and µ-¶ with many country possible ‡ Under 3 Heads : Current / Capital / Official Reserve A/c

_ O P ± Current A/c    ‡   Tangible Goods : Oil, Automobiles, Machines, Computers, Food Grains, Clothes, etc ‡   Consulting, Royalties, Legal, Patents, Insurance, Intellectual Properties, Tourism, etc. ‡ |Interest, Dividend, Return on Investments ‡  !Foreign Aid, Official /Personal Gifts, Grants. This is the only Uni-directional flow "| #
$% : ‡ "!Fund by _orrowings / From Accumulation ‡ &'&Collect IOUs from Foreign Countries

_ O P ± Capital A/c    ‡ |" Invest in a Company / Subsidiary in another Country ‡ $! Invest in Stocks / _onds etc: No Transfer of Control ‡ Deposits / Trade Credits, Currency, etc. to utiilise advantage of Interest Rate Differential

_ O P ± Statistical Discrepancies    ‡ #( 

_OP± # !! Total of Current A/c, Capital A/c, Statistical Discrepancies ‡ µ±¶ : Owes to the rest of the World ‡ µ+¶ : Due from the rest of the World ‡ Settled accordingly : Loan / Gold / Forex / SDR ‡ Under the earlier Fixed Exchange Rate Regime : Current A/c + Capital A/c = 0 ‡ Under the present Flexible Exchange Regime : Current A/c Surplus / Deficit : Change in Capital A/c

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International Reserve Assets / Official Reserve Assets

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‡Gold ‡Foreign Exchange ‡SDR ‡Reserve Position in the IMF

‡Gold : No longer Popular : 3% ‡94% : Foreign Exchange

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Markets & Institutions

FX Markets

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‡Purchase / Sale of Foreign Currency ‡_iggest Market : $ 1.2 Trillion / day! ‡$ 200 per living person on this Earth!! ‡Not a physical structure but Virtual ‡Contains Wholesale / Retail Dealers ‡Dealings through Two-way Quotes ‡Network of Computers, Phones, Dealing Machines ‡Runs on Safe, _est Communication Systems ‡Reuters and E_S : Largest vendors of Quotes ‡24 / 7 / 365; Most of the trading : 9 ± 12 Hrs

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& Sydney, Tokyo, Hong Kong, Singapore, _ahrain &' Zurich, Frankfurt, Paris, _russels, Amsterdam London   N Y, Montreal, Toronto, Chicago, San Francisco & L A

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International FX _usiness

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FX : Average Daily Turnover

+'!|), -  .#) ‡ International _anks : _uy both for themselves and for other retail clients
# ‡ )& MNCs, Money managers, Speculators ‡ , )" Investment _anks etc. ‡ ) : Match _uy / Sell requirements ‡ ) : More to regulate Rates

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 Secure Environment Individual Traders for Particular Currency Generally : Most Trades : US $ denominated /& Direct (American) / Indirect (European) Two Way Quotes : Sell ( _id ) / _uy ( Ask/Offer ) Spread : Difference between Sell / _uy Inter-_ank: Standard Size: US $ 10 M (ten dollars) Real-Time Quotes : Immediate Decision : |0
Quote : $ V
67 - $ V
72 _ig Figure / Small Figure : Quotes :Small Figure ‡ Screen _ased Trade : Automatically Appear ‡ Cross Currency : Through $ Rate O
ýS($/£) S($/¼)

FX Payment Gateways

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.|  Society for Worldwide Interbank Fin. Telecom ‡ Private Non-Profit Message Transfer System ‡ Headquarters in _russels ‡ Switching Centers in Netherlands and Virginia ‡ All Constituents of the FX market connected through this ‡ Transactions involving All Currencies  $Clearing House Interbank Payments System ‡ Along with Federal Reserve _ank System, provides a Clearing House ‡ Settlement of Interbank USD Payments

FX Rates

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$  Exchange Rate for  Delivery ‡ Quoted and Traded everyday - Today ‡ Settlement in generally 2 working days |
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"Exchange Rate for |&& Delivery ‡ Quoted and Traded everyday - Today ‡ Settlement at agreed Rate at an Agreed Future Date "
 /  American Terms ‡ Home Currency / 1 Unit of Foreign Currency ‡ $ 1 = Rs.43.64 ; £ 1 = Rs.68.96 ; ¼ 1 = Rs.52.23 "
 /&European Terms ‡ Foreign Currency / 1 Unit of Home Currency ‡ 1 / Direct Quote ‡ Re 1 = $ 0.2291; Re 1 = £ 0.0145 ; Re 1 = ¼ 0.0191

|- *+!|&&$&# ‡ Premium ( for Sale ) / Discount ( for Purchase ) ‡ Major Currencies : $ / £ / ¼ ‡ Standard Maturities : 1,3,6,9,12 Months ‡ Other Maturities are also available ‡ Longer terms : Even up to 10 Years possible ‡ Notation : FN($ / £) ; µN¶ : Number of Months : 1,3,6,9,« ‡ S ($ / £) Spot rate between $ and £ S($/SF) .6653 F1($/SF) .6660 F3($/SF) .6670 F6($/SF) .6684

-'  &&1$&2!'*|- ‡ Account for about 50% - 60% in Interbank Trade ‡ _ulk of Trade :Swaps for Forwards ‡ FX Dealers Conversations / Quotes : µForward Points¶ Spot $/£ 1.5267±1.5272 One-Month 32±30 Three-Month 57±54 Six-Month 145±138

One-Month Three-Month Six-Month

|-$ /& 32±30 57±54 145±138

Spot $/£ : 1.5267±1.5272 &*|- /& 1.5235±1.5242 1.5210±1.5218 1.5122±1.5134

Risk - Forex

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‡ 
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) ‡ Parent Company ± Having Subsidiaries Globally ‡ A/c maintained in different Reporting Currencies ‡ Consolidation : Parent Company¶s Home Currency ‡ Current Rate ( _alance Sheet Items ) ‡ Temporal : Individual Assets Revalued ± Existing Rate ‡ Monetary/Non-monetary: Current/Average/Historical ‡ Average Rate (P/L A/c Items) ‡ Impacts the Networth of Parent / Holding Company ‡ 
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"# 3 " 3 ( Direct tax is demanded from the very persons who, it is intended or desired , should pay it´  3( Indirect tax is demanded from the very persons in the expectation and intention that he shall indemnify himself at the expanse of others

" 3 "+' by the persons on whom it is legally imposed

 3 +' by the other persons

'is on the same persons who pays the tax

' is on many persons

3& cannot be shifted to other persons & consumer directly pays to Local /State / Center Governments.

3& can shift to the other persons (other than the payee).

3'Income tax ,house Consumption taxes, Excise property tax, land and estate tax duties, Sales Tax, Octroi. or service tax


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A physical measurement like Tax on value of a commodity. 



 the weight or volume of a Definite percentage of value of commodity. goods. Example : Water Tax

Example : Finished goods

'+$ 3

'+3 A tax on war profits to pay off a large amount of debt in a short period of time.

$3 Taxes on income

Example:Kargil war tax

Example: property tax

3, 4 ‡ Main Source of Revenue to the Governments ‡ Could be by Federal / Central Govt. / States / Local ‡ Residential Status is relevant ‡ Primary Types : ‡ Income Tax : Personal / Corporate ‡ With-holding Tax : On Payouts ‡ Value Added Tax ‡ An important factor in Funding Decisions ‡ Global Scenario : Complex : Different Countries «

||  5  EQUALITY CERTAINTY SIMPLICITY CONVINENCE ECONOMY PRODUCTIVITY ELASTIC DIVERSITY

3, 4 ‡ It is a compulsory contribution imposed by a public authority. ‡ Pre-decided. ‡ Dose not confer direct and proportional benefits to tax payer. ‡ Tax policy to conform to criteria of buoyancy and elasticity

3,  6 ‡ 3&+: o '3'&+, Raises Tax Revenue but Economic Resources allocated uniformly _asic Assumption : World-wide Economic Efficiency o &+, This is a difficult concept Income Taxed same way irrespective where earned o ''&+( Difference in Tax Rates in Different Countries Value ‡ 37&+ 7&! 3

34 ‡ Incomes : Taxed : Due or Receipt ‡ _ased upon Residential Status ‡ Multiple Income Avenues : ‡ Capital Gains / Immovable Properties ‡ _usiness / Profession ‡ Dividend / Interest / Royalty / Mgmt. Fees « ‡ Personal : Artists / Musicians / Sportsmen ‡ Pensions

!& ‡ Global Trade : Income earned in many countries ‡ Incomes : Capital / Revenue ‡ Tax on such earnings : Taxability : Once / More?? ‡ Multiple Tax : Un-favourable for businesses ‡ What is the solution ??? ‡ Some Countries accord Credit ‡ Other Countries enter into Treaties ‡ _etween Countries ‡ Generally in line with UN Guidelines ‡ Understanding that Income taxed only once ‡ Treaties for Different pairs of Countries ‡ Most countries have Treaties with most others ‡ India : with 79 Countries

!&

Dell ± Laptop - USA Hardware China

Taiwan

Software Japan

USA

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Dell ± USA ± 35% Hardware China 31%

Taiwan 25%

Software Japan 47%

USA 35%

3 89:' 3 ‡ _ahamas ‡ _ahrain ‡ _ermuda ‡ Cayman Islands

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 * ‡ !"& 3 ‡ How ??? ‡ DTAAs / Treaties ‡ Governments define Criteria for Taxing ‡ Definition of Income / Rates / Dispute Resolution ‡ Facilitate Exchange of Information ‡ Unilateral ‡ _ilateral

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61994 Treaty


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$% 3+&+

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  „ Allocation of exclusive taxing rights „ Facilitates Consultation $
;   || %;   TAXES ON INCOME, PROFITS OR GAINS AND CAPITAL GAINS

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„Transfer pricing adjustments „Exchange of information 
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