Deck 21: International Tax Environment and Transfer Pricing

Question 1

The idea that the tax burden a host country imposes on the foreign subsidiary of a MNC should be the same regardless of the country in which the MNC is incorporated and the same as that placed on domestic firms is earned is referred to as

A)capital-export neutrality.
B)capital-import neutrality.
C)National neutrality.
D)none of the above

Answer 1

B

Question 2

The idea that taxable income is taxed in the same manner by the taxpayer's national tax authority regardless of where in the world it is earned is referred to as

A)capital-export neutrality.
B)capital-import neutrality.
C)national neutrality.
D)none of the above

Answer 2

C

Question 3

The idea that an ideal tax should be effective in raising revenue for the government but not have any negative effects on the economic decision-making process of the taxpayer is referred to as

A)capital-export neutrality.
B)capital-import neutrality.
C)national neutrality.
D)none of the above

Answer 3

A

Question 4

The three basic types of taxation are

A)income tax, withholding tax, and value-added tax.
B)income tax, withholding tax, and business tax.
C)withholding tax, value-added tax, and corporate tax.
D)personal tax, corporate tax, and operating tax.

Question 5

The underlying principle of tax equity is that

A)all similarly situated taxpayers should participate in the cost of operating the government according to the same rules.
B)all similarly situated taxpayers should participate in the cost of operating the government on an equal basis.
C)none of the above

Question 6

National neutrality

A)is the criterion that an ideal tax should be effective in raising revenue of the government and not have any negative effects on the economic decision-making process of the taxpayer.
B)requires that taxable income is taxed in the same manner by the taxpayer's national tax authority regardless of where in the world it is earned.
C)implies that the tax burden a host country imposes on the foreign subsidiary of the MNC should be the same regardless of which country the MNC is incorporated and the same as that placed on domestic firms.
D)none of the above

Question 7

Capital export neutrality

A)is the criterion that an ideal tax should be effective in raising revenue of the government and not have any negative effects on the economic decision-making process of the taxpayer.
B)requires that taxable income is taxed in the same manner by the taxpayer's national tax authority regardless of where in the world it is earned.
C)implies that the tax burden a host country imposes on the foreign subsidiary of the MNC should be the same regardless of which country the MNC is incorporated and the same as that placed on domestic firms.
D)none of the above

Question 8

If a dollar earned by a foreign affiliate is taxed under the same rules as a dollar earned by a domestic affiliate of the MNC, then we have achieved

A)capital-export neutrality.
B)capital-import neutrality.
C)national neutrality.
D)tax equity.

Question 9

Tax neutrality

A)has its foundations in the principles of economic efficiency and equity.
B)can be a difficult principle to apply in practice.
C)is determined by three criteria: capital export neutrality, capital import neutrality and national neutrality.
D)all of the above

Question 10

The criteria of tax neutrality: capital export neutrality, capital import neutrality and national neutrality

A)all consistent with one another.
B)are not always consistent with one another.

Question 11

The two main objectives of taxation are

A)tax neutrality and tax equity.
B)complexity and revenue.
C)social engineering and tax equity.
D)progressive taxation and tax neutrality.

Question 12

An income tax is a direct tax.

Question 13

Tax neutrality is determined

A)by one criterion.
B)by two criteria.
C)by three criteria.
D)by four criteria.

Question 14

Tax neutrality is determined by three criteria: which of the following doesn't belong?

A)Capital-export neutrality
B)Capital-import neutrality
C)National neutrality
D)Income neutrality

Question 15

Implementing capital import neutrality means that

A)a sovereign government follows the taxation policies of foreign tax authorities on the foreign-source income of its resident MNCs.
B)the tax burden a host country imposes on the foreign subsidiary of a MNC should be the same regardless of the country in which the MNC is incorporated.
C)the tax burden a host country imposes on the foreign subsidiary of a MNC should be the same as that placed on domestic firms.
D)all of the above

Question 16

The term "capital-import neutrality" refers to

A)the criterion that an ideal tax should be effective in raising revenue for the government and not have any negative effects on the economic decision-making process of the taxpayer.
B)the fact that taxable income is taxed in the same manner by the taxpayer's national tax authority regardless of where in the world it is earned.
C)the criterion that the tax burden a host country imposes on the foreign subsidiary of a MNC should be the same regardless in which country the MNC is incorporated and the same as that placed on domestic firms.
D)underlying principle that all similarly situated taxpayers should participate in the cost of operating the government according to the same rules.

Question 17

Capital import neutrality

A)is the criterion that an ideal tax should be effective in raising revenue of the government and not have any negative effects on the economic decision-making process of the taxpayer.
B)requires that taxable income is taxed in the same manner by the taxpayer's national tax authority regardless of where in the world it is earned.
Implies that the tax burden a host country imposes on the foreign subsidiary of the MNC should be the same regardless of which country the MNC is incorporated and the same as that placed on domestic firms.
D) none of the above

Question 18

The organizational form of a MNC can affect the timing of a tax liability. This means

A)the principle of tax equity might be violated.
B)as long as regardless of the country in which an affiliate of a MNC earns taxable income, the same tax rates apply, then the tax due date doesn't matter.
C)tax timing will even out over a reporting cycle, so there is no big deal here.
D)none of the above

Question 19

Tax equity means that

A)similarly situated taxpayers should participate in the cost of operating the government according to the same rules.
B)regardless of the country in which an affiliate of a MNC earns taxable income, the same tax rate and tax due date apply.
C)a dollar earned by a foreign affiliate is taxed under the same rules as a dollar earned by a domestic affiliate of the MNC.
D)all of the above

Question 20

Capital export neutrality

A)is a goal based on worldwide economic efficiency.
B)is an example of Mercantilism.
C)is based on host country economic efficiency.
D)is based on MNC home country economic efficiency.

Question 21

An income tax is defined by your textbook as

A)is a direct tax.
B)is an indirect tax.
C)is collected with a withholding tax.
D)none of the above

Question 22

Which statement is false?

A)Active income is defined as income that results from production by the firm or individual or from services that have been provided.
B)Passive income includes dividends and interest income, and income from royalties, patents, or copyrights paid to the taxpayer.
C)A withholding tax is a tax levied on passive income earned by an individual or corporation of one country within the tax jurisdiction of another country.
D)The current marginal U.S. income tax rate is positioned towards the lower end of the rates assessed by the majority of other countries.

Question 23

There are three basic types of taxation that national governments throughout the world use:

A)income tax, withholding tax, and value-added tax.
B)property tax, wealth tax, and death tax.
C)import quotas, duties, and tariffs.
D)tariffs, ad valorem taxes, and income taxes.

Question 24

Withholding tax rates imposed through tax treaties are

A)bilateral.
B)multilateral.
C)netted.
D)none of the above

Question 25

Assume that a product has the following three stages of production: If the value-added tax (VAT) rate is 25%, what would be the VAT over all stages of production?

A)€187.50
B)€120
C)€150
D)€225

Question 26

Assume that a product has the following three stages of production: If the value-added tax (VAT) rate is 15%, what would be the VAT over all stages of production?

A)€90
B)€120
C)€465
D)€255

Question 27

Assume that a product has the following three stages of production: If the value-added tax (VAT) rate is 20%, what would be the VAT over all stages of production?

A)€64
B)€120
C)€465
D)€225

Question 28

Many countries have tax treaties with one another. These generally specify

A)the withholding tax rate applied to various types of passive income.
B)that withholding tax rates imposed through tax treaties are bilateral.
C)the two countries agree to impose the same tax rate on the same category of income.
D)all of the above

Question 29

Assume that a product has the following three stages of production: If the value-added tax (VAT) rate is 20%, what would be the VAT over all stages of production?

A)€110
B)€120
C)€150
D)€225

Question 30

The purpose of a withholding tax

A)is to assure the local tax authority that it will receive the tax due on the active income earned within its tax jurisdiction.
B)is to assure the local tax authority that it will receive the tax due on the passive income earned within its tax jurisdiction.
C)is to assure the local tax authority that it will receive the tax due on all income earned within its tax jurisdiction.
D)none of the above

Question 31

A withholding tax is

A)an indirect tax.
B)a direct tax.

Question 32

Value-added tax (VAT) is

A)a direct national tax levied on the value added in the production of a good (or service) as it moves through various stages of production.
B)an indirect national tax levied on the value added in the production of a good (or service) as it moves through various stages of production.
C)the equivalent of imposing a national sales tax.
D)both b and c

Question 33

Assume that a product has the following three stages of production: If the value-added tax (VAT) rate is 10%, what would be the VAT over all stages of production?

A)€64
B)€36
C)€465
D)€225

Question 34

A withholding tax is defined by your textbook as

A)the money that the government takes for every worker's paycheck.
B)social security taxes.
C)a tax levied on income earned by an individual (or corporation) of one country within the tax jurisdiction of another county.
D)a tax levied on passive income earned by an individual (or corporation) of one country within the tax jurisdiction of another county.

Question 35

The current marginal U.S. income tax rate is positioned

A)pretty well in the middle of the rates assessed by the majority of other countries.
B)towards the upper end of the rates assessed by the majority of other countries.
C)towards the lower end of the rates assessed by the majority of other countries.

Question 36

Assume that a product has the following three stages of production: If the value-added tax (VAT) rate is 20%, what would be the VAT over all stages of production?

A)€90
B)€120
C)€300
D)€225

Question 37

Assume that a product has the following three stages of production: If the value-added tax (VAT) rate is 15%, what would be the VAT over all stages of production?

A)€90
B)€120
C)€465
D)€225

Question 38

Assume that a product has the following three stages of production: If the value-added tax (VAT) rate is 15%, what is the incremental VAT at Stage 2 of production?

A)€75
B)€120
C)€210
D)€255

Question 39

A withholding tax

A)is borne by a taxpayer who did not directly generate the income that serves as the source of the passive income.
B)a direct tax on workers.
C)assures the local tax authority that it will receive the tax due on the passive income earned within its tax jurisdiction.
D)both a and c

Question 40

The United States withholds ___ of passive income from taxpayers that reside in countries with which it does not have withholding tax treaties.

A)10%
B)20%
C)30%
D)40%
E)50%

Question 41

Fundamentally, there are two types of tax jurisdiction:

A)The worldwide and the territorial.
B)The residential and the visiting.
C)The passive and the active income.
D)The earned and the unearned.

Question 42

Many economists prefer a VAT to an income tax because

A)these economists are pin heads with no real world experience.
B)an income tax provides a disincentive to work, whereas a VAT is a disincentive to unnecessary consumption.
C)an income tax is an incentive to work, whereas a VAT is a disincentive to consumption.
D)all of the above

Question 43

Which of the following are true?

A)A VAT fosters national saving.
B)An income tax is a disincentive to save because the returns from savings are taxed.
C)National tax authorities find that a VAT is easier to collect than an income tax because tax evasion is more difficult.
D)All of the above are true

Question 44

Tax evasion is more difficult under a VAT because

A)at each stage in the production process producers have an incentive to obtain documentation from the previous stage that the VAT was paid in order to get the greatest tax credit possible.
B)customers can't convince retailers to sell things without a receipt.
C)the cost of record keeping under a VAT system imposes an economic hardship on small businesses.
D)none of the above

Question 45

A direct foreign tax credit is

A)computed for direct taxes paid on active foreign-source income of a foreign branch of a U.S. MNC.
B)computed on the indirect withholding taxes withheld form passive income distributed by the foreign subsidiary to the U.S. parent.
C)computed for income taxes deemed paid by the subsidiary.
D)both a and b

Question 46

The typical approach to avoiding double taxation is

A)for a nation to grant the parent firm credit against its domestic tax liability for taxes paid to foreign tax authorities on foreign-source income.
B)for a nation not to tax foreign-source income of its national residents.
C)for a company to use both worldwide and the territorial methods.
D)none of the above

Question 47

Assume that a product has the following three stages of production: If the value-added tax (VAT) rate is 20%, what would be the VAT over all stages of production?

A)€64
B)€120
C)€2,808
D)€3,000

Question 48

The territorial method of declaring a national tax jurisdiction is to

A)tax all income earned within the country by any taxpayer, domestic or foreign.
B)tax national residents of the country on their worldwide income no matter in which country it is earned.
C)also known as the residential method.
D)none of the above

Question 49

Assume that a product has the following three stages of production: If the value-added tax (VAT) rate is 15%, what would be the VAT over all stages of production?

A)€390
B)€120
C)€465
D)€225

Question 50

The territorial method of declaring a national tax jurisdiction

A)is to tax national residents of the country on their worldwide income no matter in which country it is earned.
B)is to tax all income earned within the country by any taxpayer, domestic or foreign.
C)is to tax foreign residents of the country on their home-country income but not foreign-earned income.
D)none of the above

Question 51

Assume that a product has the following three stages of production: If the value-added tax (VAT) rate is 20%, what would be the VAT over all stages of production?

A)€150
B)€600
C)€350
D)€225

Question 52

A value-added tax (VAT) is __________ national tax levied on the value added in the production of a good (or service) as it moves through the various stages of production.

A)a direct
B)an indirect
C)a sales tax
D)none of the above

Question 53

Under the territorial method of declaring a national tax jurisdiction

A)the possibility of double taxation exists if the parent county of a foreign affiliate also levies a tax on worldwide income.
B)tax is levied on all income earned within the country by any taxpayer, domestic or foreign.
C)tax is levied on foreign residents of the country on their home-country income but not foreign-earned income.
D)none of the above

Question 54

The worldwide method of declaring a national tax jurisdiction

A)is to tax national residents of the country on their worldwide income no matter in which country it is earned.
B)is to tax all income earned within the country by any taxpayer, domestic or foreign.
C)is to tax national residents of the country on their domestic income but not foreign-earned income.
D)none of the above

Question 55

The worldwide or residential method of declaring a national tax jurisdiction is to

A)tax national residents of the country on their worldwide income no matter in which country it is earned.
B)tax all income earned within the country by any taxpayer, domestic or foreign.
C)tax foreign residents of the country on their home-country income but not foreign-earned income.
D)none of the above

Question 56

The worldwide method of declaring a national tax jurisdiction

A)is also known as the residential method.
B)is to tax national residents of the country on their worldwide income no matter in which country it is earned.
C)is different from the territorial method of declaring a national tax jurisdiction.
D)all of the above

Question 57

In a given year, the U.S. IRS places an overall limitation applied to foreign tax credits.

A)The overall limitation is limited to the amount of tax due on the foreign-source income.
B)The overall limitation is limited to the amount of tax actually paid during the tax year on the foreign-source income.
C)The overall limitation is limited to the amount of tax that would have been due on the foreign-source income if it had been earned in the United States.
D)None of the above

Question 58

Affiliates of foreign MNCs are taxed on the income earned in the source country under

A)the territorial method of declaring a national tax jurisdiction.
B)the source method of declaring a tax jurisdiction.
C)all of the above
D)none of the above

Question 59

The foreign tax credit method followed by the United States is

A)to grant the parent firm credit against its U.S. tax liability for taxes paid to foreign tax authorities on foreign-source income.
B)in place for the purpose of avoiding double taxation.
C)both a and b
D)none of the above

Question 60

In a growing economy, the VAT would raise prodigious amounts of money

A)in a way almost invisible to tax-paying voters.
B)in a way obvious to tax-paying voters.
C)but would discourage savings.
D)none of the above

Question 61

Suppose a U.S.-based MNC makes bicycles with parts from its subsidiary in a low-tax East Asian country. The bicycle frames are made here, the component parts (cranksets, wheels, and so on) are made abroad, the bicycles are assembled in Japan and reimported to the U.S. It can reduce its reported U.S. income-and increase its subsidiary's profits-by

A)overcharging its subsidiaries for the U.S.-made frames.
B)undercharging its subsidiaries for the U.S.-made frames.
C)assembling the bicycles in the U.S.
D)none of the above

Question 62

A foreign branch is

A)an extension of the parent and is not an independently incorporated firm separate from the parent.
B)an affiliate organization of the MNC that is independently incorporated in the foreign country, and one in which the U.S. MNC owns at least 10 percent of the voting equity stock.
C)either a minority foreign subsidiary (an uncontrolled foreign corporation) or a controlled foreign corporation.
D)both b and c

Question 63

An uncontrolled foreign corporation is

A)an extension of the parent and is not an independently incorporated firm separate from the parent.
B)an affiliate organization of the MNC that is independently incorporated in the foreign country, and one in which the U.S. MNC owns at least 51 percent of the voting equity stock.
C)an affiliate organization of the MNC that is independently incorporated in the foreign country, and one in which the U.S. MNC owns at least 10 percent but less than 50 percent of the voting equity stock.
D)b and c

Question 64

A controlled foreign corporation (CFC) is

A)a foreign corporation established as an affiliate of a U.S. corporation for the purpose of "buying" from the U.S. corporation property for resale and use abroad.
B)a foreign subsidiary that has more than 50 percent of its voting equity owned by U.S. shareholders.
C)a separate domestic U.S. corporation actively engaged in business in a U.S. possession (Puerto Rico and the U.S. Virgin Islands).
D)one that has no "overall limitation" as regards to its foreign tax credits.

Question 65

The higher the transfer price

A)the higher the net profit reported by the MNC.
B)the higher the gross profit of the receiving division relative to the transferring division.
C)the higher the gross profit of the transferring division relative to the receiving division.
D)none of the above

Question 66

As a rule, payments to and from foreign affiliates,

A)involve the issue of transfer pricing.
B)involve accounting values assigned to goods or services exchanged between foreign affiliates.
C)involve tax credits trading between affiliates.
D)both a and b

Question 67

An overseas affiliate of a U.S. MNC can be organized

A)as a branch.
B)as a subsidiary.
C)both a and b
D)none of the above

Question 68

A foreign subsidiary is

A)an extension of the parent and is not an independently incorporated firm separate from the parent.
B)an affiliate organization of the MNC that is independently incorporated in the foreign country, and one in which the U.S. MNC owns at least 10 percent of the voting equity stock.
C)either a minority foreign subsidiary (an uncontrolled foreign corporation) or a controlled foreign corporation.
D)both b and c

Question 69

A "tax haven" country is one that has a low, or zero percent, national tax rates. Some of the countries that fall into this category are

A)Bahamas, Bahrain, Bermuda, and the Cayman Islands.
B)Denmark, Norway, Switzerland, and Sweden.
C)Bulgaria, Canada, Saudi Arabia, and South Africa.
D)Congo, Egypt, Kuwait, and Zaire.

Question 70

Countries differ in how they tax foreign-source income of their domestic MNCs.

A)Therefore, different forms of structuring a multinational organization within a country can result in different tax liabilities for the firm.
B)However, due to tax treaties and foreign tax credits, this is not an issue for a U.S.-based MNC.
C)But all countries tax domestic income of their domestic MNCs in the same way.
D)All of the above

Question 71

The U.S. IRS allows transfer prices to be set using the arms-length price.

A)This is a very straight-forward method to use in practice-just use the eBay price.
B)This method is difficult to apply in practice because many factors enter into the pricing of goods and services. Examples include: differences in the terms of sale, differences in quantity and or quality sold, even differences in location or date of sale.
C)All of the above
D)None of the above

Question 72

When excess tax credits go unused, the foreign tax liability for a branch is greater than the corresponding U.S. tax liability when the foreign income tax rate is greater than the U.S. rate. Calculate the total tax liability for a wholly-owned subsidiary when excess tax credits cannot be used in a country given:

A)35.00%
B)37.00%
C)43.36%
D)42.05%

Question 73

When excess tax credits go unused, the foreign tax liability for a branch is greater than the corresponding U.S. tax liability when the foreign income tax rate is greater than the U.S. rate. Calculate the total tax liability for a wholly-owned subsidiary when excess tax credits cannot be used in a country given: U.S. tax rate = 35%
Foreign tax rate = 39%
Withholding tax rate = 5%

A)44.00%
B)35.00%
C)43.36%
D)42.05%

Question 74

In a given year, the U.S. IRS places an overall limitation applied to foreign tax credits.

A)the maximum tax credit is figured on world-wide foreign-source income; losses in one country can offset profits in another.
B)the maximum tax credit is figured on foreign-source income in each country; losses in one country cannot offset profits in another.
C)the overall limitation is limited to the amount of tax that would be due on the foreign-source income if it had been earned in the United States.
D)both a and c

Question 75

As a general rule,

A)excess tax credits can be carried back two years.
B)excess tax credits can be carried forward five years.
C)excess tax credits must be used in the year recognized.
D)both a and b

Question 76

A transfer price

A)is the price that one division of a firm charges to another division of a firm.
B)is an accounting issue, not a finance issue.
C)does not involve actual cash flows, therefore does not impact the share price.
D)none of the above

Question 77

The lower the transfer price

A)the higher the net profit reported by the MNC.
B)the lower the gross profit of the transferring division relative to the receiving division.
C)the higher the gross profit of the receiving division relative to the transferring division.
D)none of the above

Question 78

These days the benefits of "tax haven" subsidiaries have been reduced by

A)the present corporate income tax rate in the United States is not especially high in comparison to most non-tax haven countries.
B)the rules governing controlled foreign corporations have effectively eliminated the ability to defer passive income in a tax haven subsidiary.
C)all of the above
D)none of the above

Question 79

In a given year, the U.S. IRS places an overall limitation applied to foreign tax credits.

A)The maximum tax credit is figured on world-wide foreign-source income; losses in one country can offset profits in another.
B)Value-added taxes paid cannot be included in determining the amount of the foreign tax credit.
C)The overall limitation is limited to the amount of tax that would be due on the foreign-source income if it had been earned in the United States.
D)All of the above

Question 80

Affiliate A sells a million units to Affiliate B per year. The marginal income tax rate for Affiliate A is 20 percent and the marginal income tax rate for Affiliate B is 50 percent. The transfer price can be set at any level between $100 and $200. Which transfer price between A and B should the parent select?

A)$200
B)$100
C)$150
D)It does not matter.