Question 1

What approach is taken by the United States of America relative to taxing income?

Accepted Answer

The United States of America takes both citizenship and residence into account when taxing income. U.S. citizens are taxed on their worldwide income regardless of where they live, while non-citizens who are residents of the U.S. are taxed on their income earned within the country. This dual approach ensures that all individuals with a connection to the U.S. contribute to the funding of government programs and services.

Question 2

What is a value added tax (VAT)?

Accepted Answer

B

Question 3

Because some countries have a lower withholding tax on interest than they do for dividends,multinational corporations may finance foreign operations with debt rather than equity. What additional reason may a MNC have for using this investment strategy?

Accepted Answer

Interest is generally a deductible expense, which reduces taxable income, whereas dividends paid are not deductible. This provides a tax advantage for financing with debt.

Question 4

In the context of international taxation,the Bahamas,Lichtenstein,and Monaco are considered by the OEDC as:

Accepted Answer

The OECD considers the Bahamas, Lichtenstein, and Monaco as tax havens, which are jurisdictions that offer low or no tax rates, strict bank secrecy laws, and limited transparency and regulation, making it attractive for businesses and individuals to avoid or evade taxes in their home countries.

Question 5

What is a tax holiday?

Accepted Answer

A tax holiday is a period of time when corporations are relieved of paying various taxes. It is often used as an incentive to attract businesses to a particular area or to encourage certain types of economic activity. During a tax holiday, specific taxes may be waived or reduced, allowing businesses to save money and potentially invest in the local economy.

Question 6

Jane,a citizen of Country X,received a corporate dividend in the amount of £10,000 from a company in the U.K. Country X did not tax Jane's dividend. Country X is using what kind of approach toward foreign source income?

Accepted Answer

The territorial approach towards foreign source income is adopted by Country X, which means that the country only taxes income that is earned within its borders. In this case, Jane's dividend income was earned outside Country X, and hence Country X did not tax it.

Question 7

What is meant by the term "thin capitalization?"

Accepted Answer

Thin capitalization refers to a situation in which a company or entity minimizes the amount of equity capital used to fund foreign operations and instead relies heavily on debt financing. This can potentially lead to an unfavorable tax situation in which interest payments on the debt are deductible, reducing the tax liability, but equity returns are not. As a result, some countries have implemented thin capitalization rules to prevent abuse of this tax loophole.

Question 8

What is the optimal tax objective for multinational corporations?

Accepted Answer

The optimal tax objective for multinational corporations is to minimize worldwide taxes paid, within the limitations of applicable tax law. This allows the corporation to save money on taxes without breaking any laws or regulations. Minimizing domestic taxes paid on worldwide income (option A) may not be feasible as many countries have laws in place that require corporations to pay taxes on their global income. Minimizing foreign taxes (option D) may not be the best choice if it requires the corporation to engage in aggressive tax avoidance schemes or if it negatively impacts its reputation.

Question 9

What is a withholding tax?

Accepted Answer

Withholding tax is an amount subtracted from a dividend payout and remitted to the government. This is done as a way of ensuring that the government receives its share of taxes on any income generated.

Question 10

Dividends received from companies in countries other than one's home country are classified as:

Accepted Answer

Dividends received from companies in countries other than one's home country are classified as foreign source income. This income may be subject to taxes in both the country of origin and the recipient's home country, depending on the tax laws of both countries. It is important for investors to understand the tax implications of foreign source income to properly plan their investments and taxes.

Question 11

What is the U.S.policy concerning taxing income of a U.S.corporation's foreign subsidiary?

Accepted Answer

The U.S. follows a policy of deferral, which means that the foreign subsidiary's income is not taxed until the profits are returned to the U.S. parent as dividends. This is done to avoid double taxation of the same income in both the foreign country and the U.S.

Question 12

What explains the "follow-the-leader" effect of countries changing their corporate tax rates in response to changes made by other countries?

Accepted Answer

Countries may change their corporate tax rates in response to changes made by other countries to remain competitive in attracting foreign investment. This creates a "follow-the-leader" effect, where other countries feel pressure to lower their tax rates to remain competitive. Harmonization of accounting standards and currency pegging do not directly explain this effect.

Question 13

Jane,a citizen of Country X,received a corporate dividend in the amount of £10,000 from a company in the U.K. Country X taxed Jane's dividend as ordinary income. Country X is using what kind of approach toward foreign source income?

Accepted Answer

Country X is using a worldwide approach towards foreign source income, where they tax their citizens on all income regardless of the source of that income.

Question 14

Aco Ltd mined diamonds at a cost of FC 1,000,000 and sold them to Beako for FC 2,500,000. Beako distributed the diamonds to its customers and received FC 4,000,000. If the national VAT is 20%,how much tax did Beako pay?

Accepted Answer

Beako would have charged its customers 20% VAT on FC 4,000,000, which is FC 800,000. However, Beako can claim the VAT it paid on its purchase from Aco Ltd, which is 20% of FC 2,500,000 (FC 500,000), as input tax credit. Therefore, the net VAT Beako pays is the difference: FC 800,000 (output tax) - FC 500,000 (input tax) = FC 300,000.

Question 15

What is a tax haven?

Accepted Answer

A tax haven is a jurisdiction where taxes are abnormally low, encouraging individuals and corporations to set up businesses or move their financial assets there to reduce their tax burden. These tax havens often have very low or zero taxes on capital gains, dividends, or offshore profits.

Question 16

How do differences in the effective corporate tax rates between countries affect capital investment decisions?

Accepted Answer

The answer of How do differences in the effective corporate...

Question 17

There are two primary taxes imposed on profits earned by corporations in international trade. One is the corporate income tax. What is the other type of tax on earnings of multinational corporations?

Accepted Answer

The other type of tax on earnings of multinational corporations is the withholding tax. This tax is imposed on income earned by a non-resident company in a foreign country and is withheld by the country before the income is remitted back to the home country of the company. The purpose of this tax is to ensure that the foreign company pays taxes on its income earned within the jurisdiction of the country where it operates.

Question 18

In addition to having very low effective tax rates,which of the following is also a characteristic of tax havens?

Accepted Answer

Tax havens generally have all three of these characteristics: low effective tax rates, lack of transparency in financial reporting, and lack of effective exchange of information. Additionally, they often do not require substantial economic activity in order to qualify as a tax haven.

Question 19

The Organization for Economic Cooperation and Development (OECD)has established guidelines to eliminate tax havens. Why,then,can the OECD (as of 2004)still identify over 30 countries as tax havens?

Accepted Answer

While the OECD has established guidelines to eliminate tax havens, it does not have the enforcement powers to force countries to comply with them. Therefore, even though the OECD has identified over 30 countries as tax havens, it cannot force them to change their policies.

Question 20

Which of the following affect the effective corporate tax rate?

Accepted Answer

All of the choices given affect the effective corporate tax rate. Tax-based incentives, such as tax credits or deductions, directly affect the amount of taxes a company has to pay. The local corporate tax rate also directly affects the effective tax rate. The method of determining taxable income, such as the use of accelerated depreciation or inventory accounting methods, can indirectly affect the effective tax rate by influencing the amount of taxable income subject to tax. Therefore, all three choices affect the effective corporate tax rate.

Quiz 11: International Taxation