EMPLOYEE IMPACT ON THE PLAN.

Taxation issues

There are two types of cross-border taxation, inbound and outbound, which one is used will depend on the type of transaction being analyzed (Mitchel, 2009). Inbound taxation refers to non-U.S. persons/entities with U.S. income and/or activities in the U.S. – much like Toyota, since Toyota has their headquarters in Japan. Thus, Toyota sells into the U.S., placing Toyota in the inbound category (Mitchel, 2009). The key factor being that the parent company is outside of the U.S. even if Toyota is doing business through subsidiaries in the U.S. (Mitchel, 2009). Some common cross border tax issues include: U.S. withholding taxes, transfer pricing, branch profits taxes, branch interest taxes, earnings stripping, income tax treaties (more are included but not mentioned) (Mitchel, 2009).

Outbound taxation refers to U.S. persons with NON-U.S. income and/or activities, for example, a U.S. headquartered corporation has income and/or activities in another country(ies). Some common cross boarder tax issues for this category include: foreign withholding taxes, transfer pricing, foreign tax credits and foreign tax credit limitations, subpart F income, Code § 956 inclusions (aka investments in U.S. property), income tax treaties and others not listed (Mitchel, 2009).

Distinguish U.S. GAAP versus IFRS

U.S. GAAP is an acronym for Generally Accepted Accounting Principles, it is guided rules that the United States uses when preparing, presenting and reporting financial statements. The Securities and Exchange Commission (SEC)’s goal is to switch from US GAAP to International Financial Reporting Standards (IFRS), especially after the Enron and WorldCom scandals.

IFRS are used only by profit-oriented entities (Collier, 2007). Each country has had it’s own set of accounting standards and with the help of International Accounting Standards Board (IASB) a harmonization of accounting standards has been the consequence of the globalization of capital markets, and thereby establishing the need for accounting rules that can be understood by international investors (Collier, 2007). IASB’s responsibility is to set accounting standards, it is also responsible for publishing IFRS (Collier, 2007). “IFRS set out recognition, measurement, presentation and disclosure requirements dealing with transactions and events that are important in general-purpose financial reports, although some standards refer to specific industries (Collier, 2007, p. 79)”

The difference between US GAAP and IFRS is that US GAAP is only used by the United States whereas IFRS is used internationally. Most companies in the US are not required to use IFRS, but because of factors such as size, industry, geography, M&A activity, and global expansion, many companies are adopting IFRS (PWC, 2013). IFRS has influenced US GAAP to adopt its principled-based structure rather than a ruled-based structure of accounting.

The significant differences between GAAP and IFRS are in the following of financial reporting: cash flow statements, earning per share, discontinued operations, fair value measures, foreign currency translation issues, impairment of long-lived assets, income taxes, interim reporting, inventory, property, plant and equipment and investment property, segment reporting, and subsequent events (McGladrey, 2012).

Political & Legal

The automotive industry is subject to various laws and governmental regulations such as environmental matters such as emission levels, fuel economy, noise, and pollution, as well as laws and regulations related to vehicle safety (Toyota Annual Report, 2011). Toyota is required to implement safety measures such as recalls that do not comply with safety standards of laws and governmental regulations (Toyota Annual Report, 2011). The government may also impose tariffs and other trade barriers, taxes and levies, or enact price or exchange controls, and that leaves Toyota expecting to incur significant costs when complying to those regulations (Toyota Annual Report, 2011). Toyota’s financial condition and results of operations will be adversely affected if it has to incur various costs due to safety measures or meeting laws and governmental regulations, especially with new legislation or changes in existing legislation and with free repairs due to recalls (Toyota Annual Report, 2011).

Toyota is subject to legal proceedings such as product liability and infringement of intellectual property as well as legal proceedings brought by its shareholders and governmental proceedings and investigations, all of which could adversely affect Toyota’s financial condition and results of operations (Toyota Annual Report, 2011).

Toyota is subject to many risks when conducting business worldwide, some of those risks include; “natural calamities; political and economic instability; fuel shortages; interruption in social infrastructure including energy supply, transportation systems, gas, water, or communication systems resulting from natural hazards or technological hazards; wars; terrorism; labor strikes and work stoppages (Toyota Annual Report, 2011).” All of these risks could result in disruptions and delays in the operations of Toyota and affect its financial conditions.

Foreign Exchange

Other than the local currencies in which Toyota operates, Toyota does have foreign currency exposures relating to buying, selling, and financing (Wikivest, 2013). “Toyota’s most significant currency exposures relate to the U.S. dollar and the euro (Wikivest, 2013).” To evaluate its exposure to changes in foreign currency exchange rates, Toyota uses VAR (value-at-risk analysis) (Wikivest 2013).

Toyota Motor Corporation is widening its global production footprint to limit exposure to currency risk, with plans to expand production in Europe since its luxury Lexus brand is produced entirely in Japan (Rosemain, 2013). Chief Regional Officer Didier Leroy of Toyota Motor Corp. said, “We want to have a business model that completely frees us from the exchange notion (Rosemain, 2013).” This is because the yen has depreciated 6% against the euro, the weakest since 2010, and its down by 7% against the dollar, giving more reason to his statement above (Rosemain, 2013). The yen is in the negative for Japanese carmakers and because they are more competitive this year, it doesn’t mean that they were more competitive in 2008 when the yen was 170 per euro (Rosemain, 2013). As for localized production it is a current logic to localize production and, “currency fluctuations are having a huge impact on where the automakers are choosing to put their production…More natural hedges are what automakers are trying to do rather than financial hedging. That’s where the emphasis will be going forward,” Anil Valsan, global lead analyst for automotive at Ernst & Young, said in an interview (Rosemain, 2013).

10

Legal & Economic Risks of Expansion

Economic. The automotive industry continues to face a number of issues that threatens its growth potential, such as the earthquake and tsunami that hindered Japan’s supply chain, the ongoing debt crisis in the European Union that created massive production cuts and accelerated the need to right size operations, and of course the effects of Hurricane Sandy in the Us, which destroyed 250,000 vehicles (PWC, 2013).

From a regulatory standpoint, meeting global emission standards has become a daunting task for the automotive industry (PWC, 2013). The World Resources Institute claims that motor vehicles are responsible for 15% of global CO2 emissions, which gives reason as to why companies are investing into research and development of new innovations and development of next-gen technologies (PWC, 2013). The following interests will meet various global regulations; improvements in aerodynamics, the introduction of lightweight materials, low rolling resistance tires, various efficiency gains in internal combustion engines, advanced transmissions, and a broader rollout of various hybrid, plug-in, and pure electric applications (PWC, 2013). “By 2020 the development and production of EVs [electric vehicles] and supporting technologies will shift to more of a global collaboration model (PWC, 2013, p.3).”

Pricing

Product Regulations