Some U.S.-based MNCs have been maintaining a very large amount of cash in foreign countries, because they would be subject to a corporate income tax on these funds if they were remitted to the parent. The tax is implemented to cover the difference between the corporate tax rate imposed by the U.S. government and the tax rate imposed by the foreign country. In recent years, short-term interest rates in many countries have been very low, although not as low as in the United States. Write a short essay to explain whether the low interest rates may cause MNCs to make better use of their funds. What is an obvious alternative use of funds in a foreign country that an MNC would likely consider? Why might the MNC continue to just maintain funds in cash accounts (earning very low interest) rather than using the funds in a manner that could earn a higher expected return?
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