Question 1

The United States generally taxes U.S. sourced 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 under U.S. tax law. However, certain exceptions may apply depending on the type of income and the tax treaty in effect between the U.S. and the non-U.S. person's country of residence.

Question 2

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

Accepted Answer

Because the dividend is eligible for the 100% dividends received deduction, none of the foreign income taxes paid on income is creditable on the U.S. tax return.

Question 3

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

Accepted Answer

Interest expense is sourced based on the type of income generated by the corporation's assets, which could be U.S. or foreign.

Question 4

"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 specifically applies to U.S. persons (citizens, residents, corporations, and partnerships) who are conducting business outside of the United States, and outlines the tax rules and regulations they must follow.

Question 5

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

The interest is sourced based on the residence of the corporation paying the interest.

Question 6

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

Accepted Answer

Only income taxes are creditable on a U.S. tax return.

Question 7

Alex, a U.S. citizen, became a resident of Belgium in 2018. 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 United States taxes its citizens on a worldwide basis. Alex will continue to be subject to U.S. tax on income he earns in Belgium.

Question 8

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 correctly defines the concept of "nexus" in taxation.

Question 9

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

Because Canada imposes an income tax, the withholding tax is creditable as an "in lieu of" tax.

Question 10

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

Assets are sourced based on the type of income they produce, not their geographic location. A U.S. corporation allocates interest expense using the book value.

Question 11

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

According to the IRS, a non-U.S. citizen with a green card is considered a resident alien for tax purposes if they meet the substantial presence test, which considers the number of days they spend in the United States over a three-year period. Therefore, even if a green card holder spends very few days in the U.S. during the current year, they may still be considered a resident alien and subject to U.S. taxes.

Question 12

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

Only corporations are eligible for the 100% dividends received deduction on dividends paid by 10%-or-more owned foreign corporations.

Question 13

Philippe is a French citizen. During 2018 he spent 150 days in the United States on business. Because Philippe does not spend 183 days in the United States in 2018, he will not under any circumstances be treated as a resident alien for U.S. tax purposes.

Accepted Answer

The substantial presence test is calculated using a formula that takes into account days physically present in the United States in the current and immediately prior two years.

Question 14

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 source of gross profit from the sale of inventory by a U.S. retailer (e.g., Walmart) is based on where title passes. If title passes outside the U.S. (FOB: destination), the gross profit will be foreign source.

Question 15

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 statement is true. A hybrid entity established in Ireland would be treated as a flow-through entity for U.S. tax purposes, which means that its income, deductions, and credits would flow through to its owners or members and be taxed at their individual rates. However, it would be treated as a corporation for Irish tax purposes and subject to the Irish corporate tax regime. This is because Ireland does not recognize the flow-through status of hybrid entities for tax purposes.

Question 16

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

Under the Internal Revenue Code, compensation earned in the United States is U.S. source income and subject to tax if the individual was in the United States for more than 90 days and the compensation exceeds $3,000. If Cecilia were a resident of a country with which the United States has a treaty, she could be exempt from U.S. taxation under a treaty provision that allows her to work in the United States for more than 90 days during the year.

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 is subject to U.S. taxation under residence-based taxation.

Question 18

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

Accepted Answer

The U.S. government also mitigates the potential for double taxation through exemptions of income earned outside the United States from U.S. taxation.

Question 19

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

Under the permanent establishment rule in most U.S. tax treaties, a resident of the other country must have a fixed place of business (such as an office or a factory) in the United States in order to be taxable by the United States on its business profits from U.S. sources.

Question 20

U.S. corporations are eligible for a foreign tax credit for withholding taxes imposed on dividends received from 100%-owned foreign corporations.

Accepted Answer

Withholding taxes are not creditable if the dividend qualifies for the 100% dividends received deduction.

Quiz 24: The Us Taxation of Multinational Transactions