Exchange controls stem from shortages of foreign exchange held by a country. When a nation faces shortages of foreign exchange and / or a substantial amount of capital is leaving the country, controls may be levied over all movements of capital or selectively against the most politically vulnerable companies to converse the supply of foreign exchange for the most essential uses. A recurrent problem for the foreign investor is getting profits in and out of the host country without loss of value, which can occur when a currency is devalued. For example, Venezuela imposed currency controls after a two months long national strike in an attempt to stem the flow of capital from the country. The Bolivar was pegged at 1,598 to the dollar, a 53 per cent loss in value from a year earlier. Exhibits below shows how exchange controls can affect an international company’s profits. Many countries maintain regulations for control of currency and should an economy suffer an economic or foreign exchange reserves decline severely, he controls on convertibility are imposed quickly as was the case in Venezuela.
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Exchange controls also are extended to products by applying system of multiple exchange rates to regulate trade in specific commodities classified as necessities or luxuries. Necessary products are placed in the most favorable (low) exchange categories while luxuries are heavily penalized with high foreign exchange rates. Myanmar, for example, has three exchange rates for the Kyat (Kt) : the official rate (kt6: US $1), the market rate ( kt 100–125: US$1) and an import duty rate (kt 100:US $1). Since the Kyat is not convertible that is not officially exchangeable for currencies that can be spent outside the country – investors are severely affected by tax liability, and their ability to send profits outside the country is diminished. Under such exchange rates, tax liability can be very high. For instance, a profit of Kt 135,000 is worth US $ 22,500 at the official exchange rate of Kt 6 to US $1 but at the market rate, the investor has earned only US $1,000. The exchange rate difference mans that the investor has to pay tax on US$21,500 of nonexistent, unearned income. It seems not much makes sense in Myanmar these days.
Local Content Laws:
In addition to restricting imports of essential supplies to force local purchase, countries often require a portion of any product sold within the country to have sold local content, that is, to contain locally made parts. Thailand, for example, requires that all milk products contain at least 50 percent milk from local dairy farmers. Contrary to popular belief, local content requirements are not restricted to Third World countries. The European Union has had a local content requirement as high as 45 percent for screwdriver operations a name often given to foreign assemblers and NAFTA requires 62 percent local content for all cars coming from members countries.
Selective restrictions on the import of raw materials, machines and spare parts are fairly strategies to force foreign industry to purchase more supplies within the host country and thereby creating markets for local industry. Although this is done in an attempt to support the development of domestic industry, the result is often to hamstring and sometimes interrupt the operations of established industries.The problem then becomes critical when there are no adequately developed sources of supply within the country.
Tax controls: Taxes must be classified as a political risk when used as a means of controlling foreign in vestments. In such cases, they are raised without warning and in violation of formal agreements. India, for example, taxes PepsiCo and the Coca-Cola Company 40 percent on all soda bottled in India. Its most recent assault on new business is the attempt to collect $40 million in taxes on travel tickets sold online from Sabre’s (an airlines reservations service) data center in Tulsa, Oklahoma. The Indian Government contends that Sabre has a permanent establishment in India in the form of data flows between Sabre’s Tulsa processing center and the desktop computers of travel agents in India. To undeveloped countries with economies constantly threatened with a shortage of funds, unreasonable taxation of successful foreign investments appeals to some government officials as the handiest and quickest means of finding operating funds. As the Internet grows in importance, countries will surely seize on Internet transactions as a lucrative source of revenue.