Question 1

Marcel, a U.S. citizen, receives interest income from bonds issued by a Dutch corporation. The interest income will be considered U.S. source income for U.S. tax purposes.

Accepted Answer

Interest income from bonds issued by a foreign corporation (in this case, a Dutch corporation) is generally considered foreign source income for U.S. tax purposes, not U.S. source income.

Question 2

Philippe is a French citizen. During 2019 he spent 150 days in the United States on business. Because Philippe does not spend 183 days in the United States in 2019, he will not under any circumstances be treated as a resident alien for U.S. tax purposes.

Accepted Answer

Philippe could still be considered a resident alien under the substantial presence test, which considers the number of days spent in the U.S. over a three-year period, not just a single year.

Question 3

The United States generally taxes U.S. source fixed and determinable, annual or periodic income (FDAP) earned by non-U.S. persons by applying a withholding tax to the gross amount of income.

Accepted Answer

This is generally true. However, there are some exceptions and exemptions to this rule.

Question 4

Alhambra Corporation, a U.S. corporation, receives a dividend from its 100 percent owned Spanish subsidiary. The dividend is eligible for the 100 percent dividends received deduction. Any income taxes paid to a Spanish taxing authority will be creditable on the U.S. tax return.

Accepted Answer

The 100% Dividends Received Deduction (DRD) applies to certain dividends from foreign corporations, but it does not allow for a foreign tax credit for the taxes paid to the foreign country on those dividends; instead, it allows the domestic corporation to exclude the dividend income from its taxable income.

Question 5

One of the tax advantages to an individual using a corporation through which to earn income in Germany is deferral of U.S. taxation on active business income earned by the corporation until such income is remitted back to the United States.

Accepted Answer

This is known as deferral of foreign income and is a tax advantage available to U.S. taxpayers who earn income through a foreign corporation. The income is not subject to U.S. tax until it is repatriated (brought back) to the United States.

Question 6

The foreign tax credit regime is the primary mechanism used by the U.S. government to mitigate or eliminate the potential double taxation of income earned by U.S. individuals outside the United States.

Accepted Answer

The statement accurately describes the purpose and function of the foreign tax credit regime in the U.S. tax system.

Question 7

Deductible interest expense incurred by a U.S. corporation will always be treated as a U.S. source deduction.

Accepted Answer

Deductible interest expense incurred by a U.S. corporation may be treated as foreign source deduction if it is related to income from foreign sources.

Question 8

Cecilia, a Brazilian citizen and resident, spent 120 days working in the United States in the current year and earned $50,000. Because she spent more than 90 days in the United States, Cecilia's income will be treated as U.S. source and subject to U.S. taxation. The United States does not have an income tax treaty with Brazil.

Accepted Answer

Because there is no income tax treaty between the United States and Brazil, Cecilia's income earned in the United States will be subject to U.S. taxation as U.S. source income.

Question 9

Under the book value method of allocating and apportioning interest expense for FTC purposes, assets are characterized as being either U.S. or non-U.S. based on their geographic location.

Accepted Answer

Under the book value method for allocating and apportioning interest expense for Foreign Tax Credit (FTC) purposes, assets are characterized based on their functional currency, not their geographic location.

Question 10

The gross profit from a sale of inventory manufactured in the United States and sold by a U.S. retailer to a customer in Spain will always be treated as 100 percent U.S. source income.

Accepted Answer

The answer of The gross profit from a sale of...

Question 11

U.S. corporations are eligible for a foreign tax credit for withholding taxes imposed on dividends received from 100 percent owned foreign corporations, even if the dividend qualifies for the 100 percent dividends received deduction.

Accepted Answer

U.S. corporations are generally not eligible for a foreign tax credit for taxes imposed on dividends that qualify for the 100 percent dividends received deduction (DRD) under the participation exemption system, as the purpose of the DRD is to exempt foreign dividends from U.S. taxation, negating the need for a foreign tax credit.

Question 12

"Outbound taxation" deals with the U.S. tax rules that apply to U.S. persons doing business outside the United States.

Accepted Answer

Outbound taxation refers to the tax rules and regulations that apply to U.S. persons, including individuals and businesses, when they engage in economic activities outside the United States.

Question 13

The Canadian government imposes a withholding tax of 15 percent on a dividend paid by a Canadian corporation to a U.S. individual. The withholding tax will be creditable on the individual's U.S. tax return as an "in lieu of" tax.

Accepted Answer

This statement is true. The U.S. individual can claim a credit for the 15 percent withholding tax paid to the Canadian government on their U.S. tax return as an "in lieu of" tax. This helps to reduce double taxation of the same income in both countries.

Question 14

Nexus involves the criteria used by a government to assert its right to tax a person or transaction within or without its borders.

Accepted Answer

This statement is true. Nexus refers to the connection between a taxpayer or transaction and a jurisdiction, which determines if the government can impose taxes. Governments use a set of criteria to establish nexus, such as physical presence, economic activity, or virtual contacts.

Question 15

A non-U.S. citizen with a green card will always be treated as a resident alien for U.S. tax purposes regardless of the number of days she spends in the United States during the current year.

Accepted Answer

This is because a green card holder is considered a lawful permanent resident (LPR) of the United States, which automatically makes them a resident alien for tax purposes. The number of days they spend in the United States does not change this classification.

Question 16

All taxes paid to a foreign government by a U.S. individual are creditable on the individual's U.S. tax return.

Accepted Answer

Not all taxes paid to a foreign government are creditable on a U.S. individual's tax return. Only certain taxes, primarily income taxes, qualify for the Foreign Tax Credit. Taxes such as sales taxes, value-added taxes (VAT), and luxury taxes typically do not qualify.

Question 17

Amy is a U.S. citizen. During the year she earned income from an investment in a French company. Amy will be subject to U.S. taxation on her income under the principle of source-based taxation.

Accepted Answer

Amy will be subject to U.S. taxation on her worldwide income, including income from foreign sources, under the principle of worldwide taxation, not source-based taxation.

Question 18

Under most U.S. treaties, a resident of the other country must have a permanent establishment in the United States before being subject to U.S. taxation on business profits earned within the United States.

Accepted Answer

This is known as the "permanent establishment" or "PE" requirement, and it is a common feature of most U.S. tax treaties. Essentially, this means that a foreign business or individual must have a significant physical presence within the United States (e.g. a branch office, factory, or other fixed place of business) in order to be subject to U.S. tax on their profits derived from U.S. sources. Without a PE, the foreign party is generally only subject to tax in their home country.

Question 19

Alex, a U.S. citizen, became a resident of Belgium in 2019. Alex will no longer be subject to U.S. taxation on income he earns in Belgium if such income is exempted from tax under the U.S.-Belgium treaty.

Accepted Answer

The answer of Alex, a U.S. citizen, became a resident...

Question 20

A hybrid entity established in Ireland is treated as a flow-through entity for U.S. tax purposes and a corporation for Irish tax purposes.

Accepted Answer

This is true. A hybrid entity established in Ireland is treated as a flow-through entity for U.S. tax purposes, meaning its income is passed through to its owners and taxed at their individual tax rates. However, for Irish tax purposes, the entity is treated as a corporation and subject to corporate tax.

Quiz 13: The Us Taxation of Multinational Transactions