Deck 14: International Taxation and Accounting

Question 1

A ________________________ is a sales tax that is levied at each stage of the production of a product.

A)cumulative sales tax
B)progressive sales tax
C)value added tax
D)flat sales tax

Answer 1

value added tax

Question 2

What international organization has been most active in promoting international tax treaties?

A)United Nations
B)World Trade Organization
C)Organization for Economic Co-operation and Development
D)International Monetary Fund

Answer 2

World Trade Organization

Question 3

What is the primary purpose of tax treaties?

A)To ensure that the maximum allowable corporate income tax is collected
B)To prohibit more than one country taxing the same income
C)To allow countries to change income tax rates without prior notice
D)To reduce the incidents of double taxation

Answer 3

To reduce the incidents of double taxation

Question 4

If the foreign income tax rate is higher than the MNC's home-country tax rate:

A)the MNC pays no additional home-country income taxes on the subsidiary's income.
B)the MNC will pay an additional income tax that is the differential between the tax rate of the foreign country and the tax rate of the MNC's home-country.
C)the MNC's domestic income tax will be eliminated.
D)the foreign subsidiary will pay no tax in the foreign country.

Question 5

What generally happens to excess foreign tax credits that an MNC cannot use in the year that the foreign tax credits are created?

A)The unused foreign tax credits are lost.
B)Foreign tax credits not used in the year that they are created can be generally be carried forward but not carried back to reduce tax liability in future years.
C)Foreign tax credits not used in the year that they are created can generally be carried forward or carried back to reduce tax liabilities in other years.
D)Foreign tax credits not used in the year that they are created can generally be carried back but not carried forward to reduce tax liability in previous years.

Question 6

What are the primary purposes of customs and excise taxes?

A)Protection of domestic industries and products and wealth transfer
B)Discouraging the importation of lower-end products and revenue production
C)Encouraging domestic production and protectionism
D)Wealth transfer and revenue production

Question 7

If a country taxes entities within its taxing jurisdiction on all income wherever that income is earned,that country takes a ____________________ approach to taxation.

A)cross-border
B)international
C)world-wide
D)multi-national

Question 8

The foreign taxes that an MNC can usually use as credits against its domestic income taxes include:

A)all foreign taxes paid by the MNC or its subsidiaries.
B)only those taxes that the MNC pays directly.
C)foreign corporate income taxes and foreign withholding taxes.
D)only those taxes that are paid to countries approved by the home country of the MNC.

Question 9

A value added tax is assessed on:

A)the increase in the price of a product that results from inflation.
B)the marginal value that is added to a product at each stage of production.
C)the total value of a product.
D)the sales price of a product.

Question 10

Corporate functions that deal with accounting and taxes are generally referred to as:

A)controller functions.
B)financial functions.
C)financial controls.
D)treasury functions.

Question 11

How important are taxes to the economies of countries?

A)Taxes constitute at least one-third of the gross domestic product of a country,so taxes are vital to a country's economy.
B)Taxes constitute for more than half of the money that governments have to spend,so the economies of countries depend on tax collections.
C)Taxes are only a relatively small part of the economy of most countries and,therefore,are only moderately important to the economy of a country.
D)Many countries,especially developing countries,do not collect taxes,so taxes are not an important part of the economy of most countries.

Question 12

If no foreign tax credit is allowed,the effective tax rate paid by an MNC is:

A)the foreign tax rate.
B)the sum of the foreign and domestic tax rates.
C)the domestic tax rate.
D)the higher of the foreign or domestic tax rates.

Question 13

When a subsidiary of an MNC in a foreign country makes capital-related payments to the MNC,the country where that subsidiary is located may require that the:

A)subsidiary withhold taxes from the capital-related payment.
B)subsidiary obtain permission from the country where it is located before it makes the payment.
C)MNC guarantee the payment of any taxes due on the capital-related payment.
D)government of the country where the MNC is located collect taxes on the capital-related payment.

Question 14

Taxes imposed on sales transactions and usually paid by the purchaser are called sales taxes or:

A)withholding tax.
B)purchaser's tax.
C)sales revenue tax.
D)goods and service tax.

Question 15

Why would an MNC receive only a partial remittance of its wholly-owned foreign subsidiary's after-tax earnings?

A)The foreign subsidiary might remit part of its earnings to owners other than the MNC.
B)The foreign subsidiary might pay some of its earnings in salaries to the officers of the foreign subsidiary.
C)The foreign subsidiary might have to pay certain fees to the government of the country where it operates.
D)The foreign subsidiary might retain part of its earnings for reinvestment in the foreign subsidiary.

Question 16

The __________________ approach to taxation looks at each entity separately in determining tax liability and does not consider whether income has been previously taxed.

A)holistic
B)composite
C)integrated system
D)separate entity

Question 17

_____________________ can be used to allocate taxable income between different units of an MNC operating in different countries.

A)Tax pricing
B)Unit pricing
C)Transfer pricing
D)After-the-fact pricing

Question 18

What potential problem does the varying approach to taxing jurisdiction among countries present?

A)Overlapping taxation
B)Over-taxation
C)Jurisdictional conflicts
D)Double taxation

Question 19

When the income of an MNC is taxed and then the dividends that the MNC pays to investors are taxed,what is the impact on the MNC?

A)The MNC is not affected because it is not responsible for the taxes owed by its investors.
B)The MNC's cost of capital is increased because the return to investors is decreased by the tax.
C)The MNC has to reduce its taxable income to reduce the overall tax burden.
D)The MNC's ability to raise capital is affected because investors are interested in the overall tax liability of the MNC.

Question 20

If an MNC's home country allows it to deduct from its taxable income the income tax paid by its foreign subsidiary:

A)the MNC receives full credit for the foreign income tax paid by the subsidiary,and the effects of double taxation are eliminated.
B)whether the MNC receives any relief from double taxation depends on the relative tax rates between the MNC's home country and the foreign country where the subsidiary operates.
C)the MNC pays domestic income taxes on its income and on its subsidiary's after-tax income,and the effects of double taxation are reduced.
D)the foreign subsidiary is relieved of an income tax burden,and the MNC will receive a large remittance of profits from its subsidiary.

Question 21

In countries with common law legal systems,accounting standards originate from:

A)the government.
B)the private sector with the help of private,self-regulating bodies.
C)self-appointed private regulating bodies.
D)government appointed but privately-supported regulating bodies.

Question 22

The return to creditors is limited since they are only entitled to recover their debt plus interest,so creditors are interested primarily in:

A)balance accounting information so that they can evaluate their downside risks.
B)the downside risks they face,so creditors are interested in conservative accounting information.
C)accounting information that reflects their risks in the best available light.
D)the underlying value of the firm's assets.

Question 23

The distribution of taxable income over time and across countries determines the:

A)current taxable income of the MNC.
B)average income tax paid by the MNC.
C)present value of taxes an MNC pays.
D)current taxable income of MNC-subsidiary group.

Question 24

How does the U.S.deal with issuing involving transfer pricing?

A)Section 482 of the Internal Revenue Code allows the IRS to disallow transfer pricing.
B)Section 482 of the Internal Revenue Code makes transfer pricing illegal.
C)Section 482 of the Internal Revenue Code allows the IRS to reallocate income,deductions and credits among related companies.
D)Section 482 of the Internal Revenue Code allows firms to set whatever price they think is justified in transfer pricing situations.

Question 25

Reducing the variations in taxable income will:

A)lower the MNC's home-country tax burden.
B)lower the overall tax burden of the MNC and its subsidiaries.
C)lower the MNC's subsidiary's foreign tax burden.
D)not affect the MNC's overall tax burden.

Question 26

Internally,firms use performance metrics provided by accounting for:

A)communicating with potential investors.
B)applying for loans and subsidies.
C)satisfying regulatory agencies.
D)determination of compensation and for risk management.

Question 27

In the context of transfer pricing,what is an arm's-length transaction?

A)An arm's-length transaction is one in which both the buyer and the seller are satisfied with the transaction price.
B)An arm's-length transaction is a transaction in which the transfer price is determined by the IRS.
C)An arm's-length transaction is one in which the sales price is within 10% of the market price for the good or service being sold.
D)An arm's-length transaction is a transaction in which the price is set by the market and the interaction of each party attempting to get the best possible price from their perspective.

Question 28

When the USD is deemed to be the functional currency of the subsidiary of an MNC,the ______________________ method is used to translate the accounts of the subsidiary.

A)temporal rate
B)current rate
C)modified current rate
D)modified temporal rate

Question 29

The notational value of a derivative:

A)is used to determine its market value.
B)usually has nothing to do with its market value.
C)is closer to its market value the longer the term of the hedge.
D)is equivalent to the market value of the hedge in most cases.

Question 30

What can cause the taxable income of a firm to vary over time?

A)Technology and exchange rates
B)Competition and economic cycles
C)Tax rates and competition
D)Tax credits and tax deductions

Question 31

If the income tax rate in a foreign country where an MNC has a subsidiary is lower than the tax rate in the MNC's home-country:

A)the MNC might sell goods or services to that foreign subsidiary at higher prices to increase the income in the low-tax-rate country.
B)the MNC might sell goods or services to that foreign subsidiary at low prices to increase the income in the low-tax-rate country.
C)the MNC might sell goods or services to that foreign subsidiary at higher prices to decrease the income in the higher-tax-rate country.
D)the MNC might sell goods and services to that foreign subsidiary at prices that would allow the MNC and its subsidiary to have balanced income.

Question 32

_________________ accounting is more reliable than other methods in predicting future cash flows.

A)Cash-based
B)Accrual-based
C)Future-based
D)Historically-based

Question 33

Modern accounting methods attempt to satisfy two requirements imposed by government regulation and investor interest:

A)expediency and propriety.
B)accuracy and brevity.
C)transparency and reliability.
D)specificity and believability.

Question 34

A tax haven is a:

A)country with very low corporate and withholding taxes.
B)country with very low tax credits for foreign taxes paid.
C)region in which companies from countries within the region pay lower taxes than companies from outside the region.
D)country that allows the payment of taxes due over a long period of time.

Question 35

The traditional view of accounting is that its purpose is to:

A)explain how a firm reached the point it has reached and how it can expect to perform in the future.
B)determine the profit that a firm made and the opportunities to make profit that is missed.
C)calculate the taxable income of the firm.
D)document the firm's current financial position.

Question 36

The development of capital markets is directly related to demands placed on accounting systems,so:

A)highly developed capital markets demand sophisticated accounting systems.
B)highly developed capital markets have no use for accounting systems.
C)highly developed capital markets need the support of only the most basic accounting systems.
D)highly developed capital markets function without regard to the accounting system.

Question 37

What approach to accounting reflects economic income better and appears to be more transparent?

A)Code law accounting
B)Historical accounting
C)Common law accounting
D)Pro forma accounting

Question 38

When a firm chooses to use a foreign currency as its functional currency,it translates its assets and liabilities into USD using the:

A)average exchange rate.
B)forward exchange rate.
C)exchange rate existing when the assets were acquired and the liabilities incurred.
D)spot exchange rate.

Question 39

Tax strategies involving transfer pricing depend on ________________ rather than ______________________.

A)marginal tax rates rather than average tax rates
B)marginal tax rates;published tax rates
C)average tax rates;published tax rates
D)published tax rates;average tax rates

Question 40

________________ develops from governmental processes,while ______________ develops from individual actions in the private sector.

A)Code law;common law
B)Common law;code law
C)Criminal law;civil law
D)Public law;private law

Question 41

Accounting for hedges acquired for speculative purposes requires that the hedges are recorded at :

A)their actual values and gains and losses from the hedges are not shown in the accounting records.
B)as historical costs and always carried at those costs.
C)at market value and gains and losses from the hedges are recorded periodically.
D)at historical costs but their values are adjusted periodically to reflect market values.

Question 42

How can MNCs use payments received from subsidiaries to reduce the overall tax burden of the MNC-subsidiary group?

Question 43

A hedge that attempts to protect the market value of a specific asset of a firm is called a:

A)asset protection hedge.
B)market hedge.
C)fair value hedge.
D)cash flow hedge.

Question 44

How were derivative transactions originally recorded by corporations?

A)They were not recorded directly in a corporation's books and records but were reflected as off-balance sheet transactions.
B)They were recorded as assets at their original costs,and the profit or loss was recorded when the derivatives were sold.
C)They were recorded as assets at their original costs,and those costs were adjusted periodically to reflect gains or losses in value.
D)They were not recorded as assets or liabilities until they matured and the profit or loss could be determined.

Question 45

How does the concept of double taxation apply to MNCs?

Question 46

Why do some small firms choose not to hedge transactions even though there may be a benefit from hedging?

A)They do not have the in-house expertise to enter into the proper hedging transactions.
B)The cost of complying with accounting regulations related to hedging outweigh the benefits that might be gained from hedging.
C)Small firms generally do not have enough at stake financially to allow them to deal with firms engaged in hedging.
D)Creditors of small firms generally refuse to allow the firms to be involved in hedging transactions.

Question 47

How does the separate entity approach to taxation differ from the integrated system approach?

Question 48

Why is the value of many derivatives difficult to determine for accounting purposes?

A)Many derivative decline in value over time,so only average values can be determined.
B)Many derivative fluctuate in value over time,so only average values can be determined.
C)Many derivatives are controlled by governments,so the stated value of a derivative may not be its actual value.
D)Many derivatives are private contracts for which there is no active market,so values are difficult to determine.

Question 49

How can MNCs benefit from using foreign tax credits?

Question 50

What does transfer pricing mean in the context of the operations of MNCs?