Today, you can invest anywhere without stress because of globalization! International and local investing are suitable for particular situations. So, it's not uncommon to hear financial advisors recommend either of the two. In this guide, you'll discover everything you need to know about international investments and global taxes. So, let's get to it!
Probably, you're already a successful local investor and looking to spread your wings to international markets. This is where international investments come in handy. But, what are international investments, you ask?
International investments are an investing strategy used by savvy investors to diversify their portfolios by investing in financial instruments or acquiring ownership of foreign corporations. There's no restriction on what one can invest in!
Therefore, an investor can invest in financial instruments like shares and mutual funds and foreign corporations depending on interest and available capital. Diversifying reduces risk on the portfolio while maximizing the return on investment.
In addition, international investments allow investors to capitalize on better foreign economies, especially when the local one is performing dismally. And it makes sense: as a business person, you only want to invest where there's a guaranteed return on investment.
That being said, there are several types of international investments you can try out. However, the two main ones for private investors are foreign direct investment (FDI) and foreign portfolio investment (FPI). The others are cross-border loans and government funds.
1. Foreign Direct Investment (FDI)
Foreign direct investment is an arrangement where an investor acquires ownership of a foreign business. The FDI arrangements allow collaboration between the investor and the foreign business owner or owners.
In addition, this arrangement gives the investor decision-making powers in the foreign business, though to a certain extent depending on the agreement. Overall, this enables investors to influence the direction the business takes in the present and future.
Investors that go with FDI arrangements always have three options: Greenfield projects, brownfield investments, and joint ventures. Greenfield projects are when investors establish new businesses in foreign economies from the ground up.
Joint ventures are collaborations between an investor and an existing business. If you already have a corporation, you can enter into a joint venture with a foreign corporation to expand your business operations.
On the other hand, brownfield investment presents the opportunity to acquire or merge with an enterprise in a foreign economy. Depending on personal preference and jurisdiction legislation, you can choose to go with either of the three.
2. Foreign Portfolio Investment (FPI)
Foreign portfolio investment is an investment by an investor in a foreign company. Unlike FDI, in FPI, the investors get into this arrangement when they don't want to own a whole or part of the foreign enterprise.
FPIs include investments like shares and bonds. They are long-term investments driven by monetary and fiscal policies like interest rates and inflation rates of the foreign economy. Nonetheless, they're flexible, and investors can quickly dispose of them whenever the need arises.
Overall, international investments present both benefits and risks to investors. As a savvy investor, you want to know all the pros and cons before putting your hard-earned money into this. That being said, the main benefit is the ability to diversify your portfolio to maximize ROIs.
On the other end, the main risk associated with international investments is global financial policies. How do we mean? You're probably asking. Global financial policies are recommendations and proposals put in place by global institutions to influence the global economy. An example of such a policy instrument is global taxes.
Global taxes are international tax regulations applicable to multinational companies. The taxes are levied on corporations to generate funds for alleviating global problems and developments. For example, the collection goes to fighting and reducing poverty and starvation in marginalized countries worldwide.
In addition, the money is also used to fund basic education for school-going children and to combat diseases like HIV and malaria. Donations from tier I countries are never adequate to solve these global problems.
That's why a global system for raising funds for these projects has been put in place through global taxes. Global taxes affect ROIs from foreign direct investments and foreign portfolio investments.
The investment space is known for surprises, and this can be an unpleasant one. You'll be in for a rude shock when you aren't aware global taxes can significantly lower your returns from international investments. This mainly occurs from double and over-taxation.
Implications of Global Taxes to International Investments
For a long time, global taxes haven't been welcomed by many governments worldwide because of the implications on expected tax revenues. After a series of discussions with different stakeholders, the Organization for Economic Co-operation and Development (OECD) has released new proposed guidelines for international tax rules.
The proposed laws allow enterprises to pay little tax to the US government but more to the overseas jurisdictions. Thus, the US government should expect low tax revenues from large US enterprises if the proposed guidelines are passed.
The worst part is that corporation earnings from foreign economies will be subject to higher taxation. From an economic point of view, foreign direct investments and foreign portfolio investments will be making a significantly low return on investment.
Thus, if you own or thinking of owning large corporations outside the United States, you should be ready to put up with insanely high tax expenditures. According to the proposed global tax guidelines, large companies will pay between 20% and 30% of profits.
Overall, global taxes have negative implications for large corporations with foreign assets in foreign economies. So, they need notchy tax advice before setting up foreign direct investments or foreign portfolio investments overseas. If this is like you, you can use the services of an international tax expert.