Deck 16: International Taxation Issues

Question 1

Assume that a wholesaler purchased goods from a manufacturer was £34.50 (gross price), the VAT is 15%, and the VAT paid by the manufacturer was £4.50. The markup on the merchandise is £10. What is the net amount of VAT paid to Customs and Excise under the British system of computing VAT?

A) £1.5
B) £5.0
C) £46
D) none of the above.

Answer 1

A

Question 2

Tax holidays are days when the government accountants have a vacation.

Answer 2

False

Question 3

Except for certain CFC cases, U.S. parent does not declare income from a foreign corporation for tax purposes until it actually receives a dividend.

Answer 3

True

Question 4

The two approaches to taxing corporate income are the classic and the integrated systems.

Question 5

The value added tax is a (an)

A) corporate income tax.
B) withholding tax.
C) indirect tax.
D) tax credit.

Question 6

The concept of neutrality means that

A) under similar circumstances, taxpayers should pay the same tax.
B) the tax effect should not have an impact on business decisions.
C) assets and liabilities should not be subject to taxation, only increases in equity.
D) foreign and domestic source income should always be taxed at the same rate.

Question 7

The concept which assets that Hong Kong should only tax income that is earned in Hong is know as the

A) worldwide approach.
B) territorial approach.
C) multidomestic approach.
D) transnational approach.

Question 8

Double taxation occurs on corporation income and stockholders' dividend income.

Question 9

Gains and losses from foreign currency transactions are treated as capital gains in the U.S.

Question 10

The concept of equity means that

A) under similar circumstances, taxpayers should pay the same tax.
B) the tax effect should not have an impact on business decisions.
C) assets and liabilities should not be subject to taxation, only increases in equity.
D) foreign and domestic source income should always be taxed at the same rate.

Question 11

A tax that is applied at each stage of the production process is known as a

A) corporate income tax.
B) withholding tax.
C) value-added tax.
D) sales tax.

Question 12

The concept where under similar circumstances, taxpayers should pay the same tax is

A) double taxation.
B) a tax incentive.
C) equity.
D) neutrality.

Question 13

The concept where the tax effect should not have an impact on business decisions is

A) double taxation.
B) a tax incentive.
C) equity.
D) neutrality.

Question 14

The IRS requires that all transfers among related enterprises take place at "arm's -length" prices.

Question 15

The total amount of branch profits included in parent income includes the foreign exchange gain.

Question 16

Two different approaches to the taxation of foreign source income are the territorial approach and the statutory approach.

Question 17

A tax have is a place where foreign investors pay a minimum of tax to their home country.

Question 18

The taxation of both domestic and foreign source income is known as

A) double taxation.
B) the worldwide approach.
C) effective vs. statutory.
D) a tax incentive.

Question 19

Which of the following is true concerning tax harmonization in the European Union?

A) The EU has harmonized rates and categories in the value-added tax.
B) The EU requires the use of the split rate form of tax system.
C) Tax rates have been coming down in the EU.
D) Although tax rates have not been harmonized, taxes bases and tax systems have been.

Question 20

The basic concept of VAT is that a tax is applied at each stage of the production process.

Question 21

Subpart F income

A) is active income if earned in low-tax countries.
B) is not eligible for the deferral principle.
C) is eligible for the tax credit.
D) requires that income be earned from the sale or purchase of goods produced inside the country where the tax haven corporation is located.

Question 22

Assume that a U.S. company has a subsidiary in the United Kingdom that earned $100,000 (translated from pounds to dollars) in 1996 at a tax rate of 40 percent. The tax rate in the United States is 34 percent, and the withholding tax rate on dividends is 5 percent. If the subsidiary does not declare a dividend, how much of its income is included in U.S. taxable income?

A) $100,000
B) $ 60,000
C) $ 39,600
D) nothing.

Question 23

On January 1, Multicorp, a U.S. firm, sells £200,000 of merchandise on account to an importer in Britain with payment due on February 15. The relevant exchange rates are as follows:
January 1 $1.6260
January 31 $1.5995
February 15 $1.5900
February 28 $1.5855
What would be the gain or loss for U.S. tax purposes on February 15?

A) No gain or loss would be recognized.
B) $5,300 loss
C) $7,200 loss
D) $1,900 loss

Question 24

If the French subsidiary of a U.S. company ships components to its U.S. parent at an arbitrarily low transfer price,

A) the French subsidiary will show relatively high profits.
B) the French government will collect relatively low corporate income tax.
C) U.S. Customs will collect relatively high tariffs.
D) the U.S. parent will show lower pre-tax profits.

Question 25

Assume that a U.S. company has a subsidiary in the United Kingdom that earned $100,000 (translated from pounds to dollars) in 1996 at a tax rate of 40 percent. The tax rate in the United States is 34 percent, and the withholding tax rate on dividends is 5 percent. If the subsidiary declares a 100% dividend, how much of its income is included in U.S. taxable income?

A) $100,000
B) $ 60,000
C) $ 39,600
D) nothing.

Question 26

Assume that a U.S. company has a subsidiary in the United Kingdom that earned $100,000 (translated from pounds to dollars) in 1996 at a tax rate of 40 percent. The tax rate in the United States is 34 percent, and the withholding tax rate on dividends is 5 percent. If the subsidiary declares a 100% dividend, what is the amount of its direct and deemed direct tax credit?

A) $40,000
B) $ 3,000
C) $43,000
D) $34,000

Question 27

Which of the following is the correct transfer pricing rule that can be followed by an FSC?

A) All transfer prices must be arm's-length prices.
B) Special rules allow the exporter to sell goods or services to the FSC at less than an arm's-length price.
C) Special rules apply for FSC income that arises from export services performed inside the United States for its parent companies.
D) Special rules apply only for income that is exempt from U.S. taxation.

Question 28

According to the U.S. IRS, which of the following is true concerning the taxation of gains and losses on foreign currency transactions?

A) Gains are recognized when the financial obligation has been settled, but losses are recognized immediately.
B) Losses are recognized when the financial obligation has been settled, but gains are recognized immediately.
C) Gains and losses are recognized immediately.
D) Gains and losses are recognized when the financial obligation has been settled.

Question 29

The price set on goods and services transferred between a parent and subsidiary is known as a (an)

A) transfer price.
B) arms-length price.
C) allocation price.
D) none of the above.

Question 30

In the allocation of overhead in an MNE,

A) U.S. tax law permits the allocation of U.S.-overhead to foreign source income.
B) U.S. tax law allows firms to allocate overhead based on manufacturing strategy.
C) Japanese have separated overhead allocation and corporate goals in order to drive down costs.
D) Japanese managers use allocation techniques primarily to measure costs.

Question 31

All of the following foreign corporations derive more than 50 percent of their income from subpart F income. Which of them must recognize the subpart F income in the year in which it is earned? The percentage ownership of each shareholder is provided in parenthesis.

A) U.S. shareholder A (10), Foreign shareholder B (20), U.S. shareholder C (35), U.S. shareholder D (5), Foreign shareholder E (15), U.S. shareholder F (15)
B) U.S. shareholder A (5), Foreign shareholder B (40), U.S. shareholder C (15), U.S. shareholder D (15), Foreign shareholder E (10), U.S. shareholder F (15)
C) U.S. shareholder A (50), Foreign shareholder B (20), U.S. shareholder C (5), U.S. shareholder D (5), Foreign shareholder E (15), U.S. shareholder F (5)
D) all of the above since subpart F income exceeds 50 percent of total.

Question 32

According to changes in the U.S. tax laws related to transfer pricing,

A) the level of complexity and documentation has been lowered significantly.
B) companies will have less flexibility in determining transfer pricing practices.
C) companies have to gather a lot of information from the third-party marketplace to justify their transfer pricing practices.
D) the IRS is not concerned with analyzing which transfer pricing method is the best method.

Question 33

In order the minimize the effects of double taxation, the U.S.

A) permits the use of a tax credit.
B) allows firms to use the split rate or imputation tax system.
C) allows MNEs to use the lower of the U.S. or foreign tax rate.
D) requires firms to deduct foreign income taxes paid.

Question 34

The principle whereby foreign source income is not taxed until received by the U.S. shareholder is known as

A) the tax credit.
B) deferral.
C) a tax treaty.
D) double taxation.

Question 35

Assume that a U.S. company has a subsidiary in the United Kingdom that earned $100,000 (translated from pounds to dollars) in 1996 at a tax rate of 40 percent. The tax rate in the United States is 34 percent, and the withholding tax rate on dividends is 5 percent. If the subsidiary declares a 100% dividend, what is the maximum allowable tax credit according to U.S. tax law?

A) $40,000
B) $ 3,000
C) $43,000
D) $34,000

Question 36

Which of the following is true concerning taxable earnings of foreign corporations according to the U.S. IRS?

A) The temporal method must be used to translate financial statements into dollars.
B) Active income of a CFC is not recognized until distributed as a dividend.
C) Passive income does not need to be recognized.
D) Passive income of a CFC is taxed after being translated into dollars at the average exchange rate.

Question 37

According to the tax credit,

A) companies are allowed to defer the recognition of income until a dividend has been declared by the foreign corporation.
B) income can be excluded from U.S. taxation.
C) firms can reduce their tax liability by the amount of income taxes paid to foreign governments.
D) credits can be given for active but not passive income.

Question 38

In the US, for foreign corporations that are not CFC

A) the deferral of income applies when it is foreign-based company shipping income
B) income is not taxable to the U.S parent corporation until a dividend is declared
C) the deferral of income includes bribes paid in foreign countries
D) requires that income be earned from the sale or purchase of goods produced inside the country where a tax haven corporation is located.

Question 39

The most important influence on transfer pricing decisions is

A) management of cash flows.
B) market conditions in the foreign country.
C) exchange controls.
D) U.S. export incentives.

Question 40

In the U.S. tax law, an excess credit (if the foreign tax rate exceeds the U.S. tax rate)
I)can be carried back and applied against foreign source income of prior years
II)carried forward to be applied against foreign source income in future years

A) I
B) II
C) either I or II
D) neither I or II

Question 41

According to the Foreign Sales Corporation Act,

A) the Domestic International Sales Corporation (DSC) is no longer permitted.
B) FSCs must be owned by foreign corporations to get the tax break.
C) all FSC income is exempted from U.S. tax.
D) the FSC must be incorporated in a foreign country or U.S. possession.

Question 42

In choosing the correct entry strategy in the context of the tax environment,

A) exports are typically not affected by tax rules since they are made from the home country anyway.
B) it is best to organize a foreign branch in the early years if operations are not profitable.
C) it is best to organize a foreign subsidiary in the early years if operations are not profitable.
D) foreign tax incentives are not useful, because they are typically offset by home country regulations.

Question 43

For U.S. companies, why is it an advantage to have a foreign branch in the early years of a foreign enterprise.

A) Branch remittances are subject o withholding taxes.
B) Losses can offset home office income for tax purposes.
C) Earnings distributed to the home office are translated at the exchange rate in effect at year end.
D) Profits are subject to CFC rules.

Question 44

Which of the following is not true concerning the taxation of expatriate income?

A) The taxpayer must have been a resident outside of the United States for an uninterrupted period that includes less than an entire taxable year or less than at least 330 full days during any twelve consecutive months.
B) The taxpayer can exclude from U.S. taxation the lesser of the individual's foreign earned income or $70,000.
C) The $70,000 exclusion is an increase from the prior year.
D) A housing allowance is permitted.

Question 45

Which of the following accurately describes how the U.S. taxes foreign branch earnings.

A) Earnings that have been distributed to the home office are taxable, but earnings that are retained in the foreign location are not.
B) Neither earnings distributed to the home office nor earnings retained in the foreign location are taxed in the U.S. due to the tax credit.
C) Earnings distributed to the home office are translated at the exchange rate in effect on the date of the transfer.
D) Profits not distributed as earnings are translated at the year-end exchange rate.