Question 1

All income earned by a Swiss corporation owned by a U.S. corporation is deferred from U.S. taxation until such income is remitted back to the United States.

Accepted Answer

Under the U.S. tax system, certain types of income earned by foreign subsidiaries (including those owned by U.S. corporations) are subject to current taxation under the Subpart F rules or the Global Intangible Low-Taxed Income (GILTI) provisions, rather than being deferred until repatriation.

Question 2

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 3

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 4

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 5

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

Cecilia's income will be treated as U.S. source and subject to U.S. taxation because she spent more than 90 days in the United States. The United States not having an income tax treaty with Brazil means that there is no agreement in place to avoid double taxation of income.

Question 6

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 statement is true. The United States applies withholding tax to FDAP income earned by non-U.S. persons.

Question 7

Philippe is a French citizen. During 2020 he spent 150 days in the United States on business. Because Philippe does not spend 183 days in the United States in 2020, he will not under any circumstances be treated as a resident alien for U.S. tax purposes.

Accepted Answer

The Substantial Presence Test for determining tax residency status in the U.S. considers not only the current year's days (in this case, 2020) but also counts a fraction of the days in the preceding two years. If the total equals or exceeds 183 days, Philippe could be considered a resident alien for tax purposes, even without spending 183 days in the U.S. in 2020 alone.

Question 8

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 9

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 true. A non-U.S. citizen with a green card is considered a resident alien for tax purposes as long as they meet the substantial presence test, meaning they have been present in the U.S. for at least 31 days in the current year and a total of 183 days over a three-year period that includes the current year and the two years immediately before it.

Question 10

Alex, a U.S. citizen, became a resident of Belgium in 2020. 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 11

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 12

Alhambra Corporation, a U.S. corporation, receives a dividend from its 100 percent owned Spanish subsidiary.The dividend is eligible for the 100percent 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 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 is true. The U.S. and Canada have a tax treaty that stipulates that the withholding tax on Canadian dividends paid to U.S. individuals is 15 percent, and this tax is creditable on the individual's U.S. tax return as an "in lieu of" tax.

Question 14

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 statement is true. Many U.S. tax treaties include a "permanent establishment" provision, which means that a resident of the treaty country must have a fixed place of business in the United States to be subject to U.S. taxation on business profits earned within the country. Without a permanent establishment, the profits would generally be taxed only in the other country where the resident is a resident or where the business is located.

Question 15

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 is correct. Nexus refers to the connection or link between a taxpayer (or transaction) and a particular jurisdiction that gives the government the authority to tax them. Governments use criteria such as residency, physical presence, economic activity, and other factors to determine nexus.

Question 16

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 is true. The foreign tax credit regime allows U.S. taxpayers to offset U.S. tax liability by the amount of income tax paid to foreign countries on their foreign-sourced income. This helps to avoid or reduce the double taxation of income earned abroad.

Question 17

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

Accepted Answer

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 is treated as 100 percent U.S. source income because the sale is considered to have occurred in the United States. This is because the retailer is considered to have a permanent establishment in the United States, and the sale is therefore considered to have been made through that permanent establishment.

Question 18

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 known as a "check the box" entity classification, which allows the entity to choose how it will be treated by the IRS for U.S. tax purposes. In this case, the entity has chosen to be treated as a partnership (flow-through) for U.S. tax purposes and as a corporation for Irish tax purposes.

Question 19

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 20

One of the tax advantages toan 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 correct. The U.S. follows a territorial tax system, meaning that only income earned within its borders is subject to taxation. Active business income earned by a corporation in Germany is not subject to U.S. taxation until it is remitted back to the U.S. in the form of dividends or other payments. This allows for deferral of taxation and potential tax savings.

Quiz 24: The Us Taxation of Multinational Transactions