Deck 14: Multinational Tax Management

Question 1

A tax that is effectively a sales tax at each stage of production is defined as a/an ________ tax.

A) flat
B) equitable
C) value-added tax
D) none of the above

Answer 1

value-added tax

Question 2

The territorial approach to taxation policy is also termed the ________ approach.

A) source
B) ethical
C) greedy
D) location

Answer 2

source

Question 3

Jensen Optimetrics Inc. is based in a country with a territorial approach to taxation but generates 100% of its income in a country with a worldwide approach to taxation. The tax rate in the country of incorporation is 25%, and the tax rate in the country where they earn their income is 50%. In theory, and barring any special provisions in the tax codes of either country, Jensen should pay taxes at a rate of

A) 75%.
B) 62.5%.
C) 0%.
D) 50%.

Answer 3

0%.

Question 4

Depending on the host country, corporate income taxes worldwide may be as low as

A) 0%.
B) 5%.
C) 10%.
D) 15%.

Question 5

The United States taxes the domestic and remitted foreign earnings of U.S. based MNEs no matter where the earnings occurred. This is an example of a ________ approach to levying taxes.

A) worldwide
B) territorial
C) neutral
D) equitable

Question 6

A value-added tax has gained widespread use in Western Europe, Canada, and parts of Latin America.

Question 7

A ________ tax policy is one that has no impact on private decision-making, while a ________ policy is designed to encourage specific behavior.

A) flat; tax incentive
B) neutral; flat
C) neutral; tax incentive
D) none of the above

Question 8

The issue of ethics in the reporting of income and the payment of taxes is a considerable one. The authors state that most MNEs operating in foreign countries tend to follow the general principle of

A) "when in Rome, do as the Romans do."
B) full disclosure to the tax authorities.
C) maintain a competitive playing field by cheating as much as the local competition, no more, no less.
D) none of the above.

Question 9

Corporate income tax rates

A) have been in constant decline over the last decade.
B) are becoming competitiveness argument to attract inward direct and portfolio investments.
C) tend to be higher in the highly industrialized countries.
D) all of the above

Question 10

Which of the following is an unlikely objective of U.S. government policy for the taxation of foreign MNEs?

A) to raise revenues
B) to provide an incentive for U.S. private investment in developing countries
C) to improve the U.S. balance of payments
D) All of the above are objectives.

Question 11

The primary objective of multinational tax planning is to minimize the firm's worldwide tax burden.

Question 12

Tax treaties generally have the effect of increasing the withholding taxes between the countries that are negotiating the treaties.

Question 13

The United States taxes all earnings on U.S. soil by both domestic and foreign firms. This is an example of a ________ approach to levying taxes.

A) worldwide
B) neutral
C) territorial
D) none of the above

Question 14

General Motors operates in many different countries and pays taxes at many different rates. However, they always pay the same rate as their local competitors. General Motors is operating in an environment of ________ tax policy.

A) domestic neutrality
B) foreign neutrality
C) territorial approach
D) none of the above

Question 15

Typical result of a tax treaty between two countries is

A) decreased level of business relationships.
B) reduced withholding tax on dividend repatriation.
C) stipulation that both countries will use worldwide approach in determining taxable income.
D) eliminating any tax on imported goods.

Question 16

Which of the following is NOT an example of a tax incentive policy?

A) The federal government gives a tax credit to MNEs that make domestic capital improvements but not foreign capital improvements.
B) Corporations are allowed to take a direct tax credit for each dollar of matching donations they make to institutions of higher education.
C) A tax law is passed that makes interest on property non tax-deductible, but interest payments on durable goods are.
D) All are examples of a tax incentive policy.

Question 17

What is the total value of taxes paid in the following example if the value added tax is 10%? A farmer raises wheat that he sells for $1.50 to the grain company. The grain company sells to the processor for $2.00 per bushel. The processor turns the wheat into a breakfast cereal and wholesales it for $3.00 per bushel. The retailer sells the cereal for $4.00 per bushel.

A) $0.15
B) $0.20
C) $0.30
D) $0.40

Question 18

A country CANNOT have both a territorial and a worldwide approach as a national tax policy.

Question 19

The basic idea behind withholding taxes for foreign investors is

A) to receive taxes on passively earned income.
B) a recognition that most foreign investors are unlikely to file taxes in the host country.
C) to ensure that income earned is taxed by the host country.
D) all of the above.

Question 20

________ taxes are applied to income and ________ taxes are applied to some other measurable performance characteristic of the firm.

A) Income; direct
B) Indirect; income
C) Indirect; direct
D) Direct; indirect

Question 21

Which of the following is NOT a disadvantage of the value-added tax?

A) The tax may have an inflationary impact.
B) It is a regressive tax.
C) It increases the total tax burden.
D) All are disadvantages.

Question 22

Use the information to answer the following question(s).
Rogue River Exporters USA has $100,000 of before-tax foreign income. The host country has a corporate income tax rate of 25% and the U.S. has a corporate income tax rate of 35%.
Refer to Instruction 14.1. If the U.S. treated the taxes paid on income earned in the host country as a tax-credit, then Rogue River's total U.S. corporate tax on the foreign earnings would be

A) $51,250.
B) $35,000.
C) $26,250.
D) $10,000.

Question 23

The purpose of a withholding tax on dividend income is to

A) raise the effective as rate of the local host country.
B) provide an incentive for MNEs to pay higher dividends to their parent companies.
C) obtain a minimum tax payment on the incomes of dividend income receipts.
D) encourage MNEs to reposition profits outside of their countries.

Question 24

Tax treaties typically result in ________ between the two countries in question.

A) lower property taxes for U.S. citizens overseas
B) elimination of differential tax rates
C) increased double taxation
D) reduced withholding tax rates

Question 25

TABLE 14.1
Uses the information to answer the following question(s).
MetroCity Designs Inc., located in Northern California, has two international subsidiaries, one located in the Ukraine, the other in Korea. Consider the information below to answer the next several questions.

Refer to Table 14.1. If MetroCity pays out 50% of its earnings from each subsidiary, what are the additional U.S. taxes due on the foreign sourced income from the Ukraine and Korea respectively.

A) Ukraine = $0; Korea = ($30,000)
B) Ukraine = $100,000; Korea = $0
C) Ukraine = $0; Korea = $66,250
D) None of the above

Question 26

A ________ is a direct reduction of taxes whereas a ________ reduces the taxable income before taxes.

A) foreign tax credit; domestic tax credit
B) tax deduction; tax credit
C) tax credit; tax deduction
D) none of the above

Question 27

Poland has a corporate income tax rate that is higher than that in the United States by the amount of 40% in Poland and 35% in the U.S. This differential mean that a U.S. parent operating with a subsidiary in Poland can realize an

A) excess profit on their Polish investment.
B) excess foreign tax deficit.
C) excess foreign tax credit.
D) none of the above.

Question 28

All indications are that the value-added tax will soon be the dominant form of taxation in the U.S.

Question 29

TABLE 14.1
Uses the information to answer the following question(s).
MetroCity Designs Inc., located in Northern California, has two international subsidiaries, one located in the Ukraine, the other in Korea. Consider the information below to answer the next several questions.

Refer to Table 14.1. The additional U.S. taxes due on the repatriation of income from the Ukraine to the United States, alone, assuming a 50% payout rate, is

A) excess foreign tax credits of $110,000.
B) additional U.S. taxes due of $97,000.
C) additional U.S. taxes due of $36,500.
D) excess foreign tax credits of $18,500.

Question 30

The two basic approaches to national tax systems are

A) domestic and foreign.
B) worldwide and territorial.
C) high and low rates.
D) continental and global.

Question 31

Use the information to answer the following question(s).
Rogue River Exporters USA has $100,000 of before-tax foreign income. The host country has a corporate income tax rate of 25% and the U.S. has a corporate income tax rate of 35%.
Refer to Instruction 14.1. If the U.S. has no bilateral trade agreement with the host country, what is the total amount of income taxes Rogue River Exporters will pay?

A) $25,000
B) $35,000
C) $51,250
D) $60,000

Question 32

Domestic tax neutrality means that

A) a dollar earned anywhere in the world by a U.S. corporation is taxed the same as if earned in the U.S.
B) tax rates are neither regressive nor progressive.
C) foreign affiliates must neutralize their income by subtraction of foreign investment credits.
D) all of the above.

Question 33

A tax that is a form of social redistribution of income is defined as a/an ________ tax.

A) un-American
B) transfer
C) flat
D) none of the above

Question 34

Use the information to answer the following question(s).
Rogue River Exporters USA has $100,000 of before-tax foreign income. The host country has a corporate income tax rate of 25% and the U.S. has a corporate income tax rate of 35%.
Refer to Instruction 14.1. If the U.S. has a bilateral trade agreement with the host country that calls for the total tax paid to be equal to the maximum amount that could be paid in the highest taxing country, what is the total amount of income taxes Rogue River Exporters will pay to the host country, and how much will they pay in U.S income taxes on the foreign earned income?

A) $25,000; $10,000
B) $25,000; $26,250
C) $35,000; $0
D) None of the above

Question 35

Use the information to answer the following question(s).
Rogue River Exporters USA has $100,000 of before-tax foreign income. The host country has a corporate income tax rate of 25% and the U.S. has a corporate income tax rate of 35%.
Refer to Instruction 14.1. If the U.S. treated the taxes paid on income earned in the host country as a tax-deductible expense, then Rogue River's total U.S. corporate tax on the foreign earnings would be

A) $10,000.
B) $26,250.
C) $35,000.
D) $51,250.

Question 36

Some countries assess extremely low corporate income tax rates on foreign source income in order to

A) attract tax haven affiliates of foreign multinationals.
B) boost the value of their domestic currency.
C) support higher taxes of their domestic companies.
D) none of the above.

Question 37

Tax credits are less valuable on a dollar-for-dollar basis than are tax-deductible expenses.

Question 38

Developing foreign markets can create shareholder value. Manipulating global tax payments does not create shareholder value.

Question 39

Which of the following factors is NOT important for U.S. corporations for determining the amount of foreign tax credit allowed for direct taxes paid on income in a foreign country?

A) the Foreign corporate income tax rate
B) the U.S. corporate income tax rate
C) the foreign corporate dividend withholding tax rate
D) All of the above are important factors.

Question 40

The value-added tax is

A) similar to an ad valorem tax on imports.
B) a form of direct taxation on corporate income.
C) a form of national sales tax.
D) none of the above.

Question 41

Tax-haven subsidiaries, categorically referred to as International Offshore Financial Centers, have the following characteristics EXCEPT

A) a low tax on foreign investment or sales income earned by resident corporations and a low dividend withholding tax on dividends paid to the parent firm.
B) a stable currency to permit easy conversion of funds into and out of the local currency. This requirement can be met by permitting and facilitating the use of Eurocurrencies.
C) a stable government that encourages the establishment of foreign-owned financial and service facilities within its borders.
D) All of the above are tax-haven subsidiary characteristics.

Question 42

________ is the pricing of goods, services, and technology between related companies.

A) Among pricing
B) Retail pricing
C) Transfer pricing
D) Wholesale pricing

Question 43

The U.S. Internal Revenue Service can reallocate revenues and expenses between parent corporations and their subsidiaries to more clearly reflect a proper allocation of income. In such instances it is the responsibility of the corporation to prove that the IRS has been arbitrary in its decision-making, thus establishing a "guilty until proven innocent" tax approach.

Question 44

The pricing of goods, services, and technology transferred to a foreign subsidiary from an affiliated company, transfer pricing, is the first and foremost method of transferring funds out of a foreign subsidiary. When engaged in transfer pricing managers must consider at least two basic factors; Fund Positioning Effect and the Income Tax Effect. Explain each of these effects.

Question 45

Explain the worldwide and territorial approaches of national taxation. The authors state that the United States uses both approaches. How can this be? Give an example of each taxation approach.

Question 46

TABLE 14.1
Uses the information to answer the following question(s).
MetroCity Designs Inc., located in Northern California, has two international subsidiaries, one located in the Ukraine, the other in Korea. Consider the information below to answer the next several questions.

Refer to Table 14.1. What is the minimum effective tax rate that MetroCity can achieve on its foreign-sourced income?

A) 26%
B) 35%
C) 40%
D) 0%

Question 47

A foreign subsidiary has $2,000,000 of taxable income, a (foreign) corporate tax rate of 25%, and a foreign dividend withholding rate of 10%. The U.S. (domestic) parent has a corporate tax rate of 30%. What are the total taxes paid by the foreign subsidiary? Assume that the foreign subsidiary is 100% owned by the U.S. parent and that all after-tax income is paid to the U.S. parent.

A) $0.00
B) $650,000
C) $500,000
D) $1,350,000

Question 48

A parent firm wishing to transfer funds out of its subsidiary country

A) can charge lower prices on goods and services sold to its subsidiary in the country.
B) can petition the Government for 0% withholding tax on interest earned worldwide.
C) can loan zero interest intra-company funds from the HQ for purchase of new assets.
D) can issue a cross border letter of credit guaranteeing for its subsidiary line of credit.

Question 49

Transfer pricing is a strategy that may be used by MNEs to

A) reduce consolidated corporate income taxes.
B) partially finance a subsidiary in another country.
C) transfer funds from a subsidiary to the parent corporation.
D) all of the above.

Question 50

In the mid 1980s the U.S. led the way to higher corporate income tax rates worldwide. Today, most of the G7 nations have surpassed the U.S. and have higher corporate income tax rates than the U.S.

Question 51

A foreign subsidiary has $2,000,000 of taxable income, a (foreign) corporate tax rate of 25%, and a foreign dividend withholding rate of 10%. The U.S. (domestic) parent has a corporate tax rate of 30%. What are the additional taxes paid by the U.S. domestic parent after the foreign subsidiary pays corporate and withholding taxes? Assume that the foreign subsidiary is 100% owned by the U.S. parent and that all after-tax income is paid to the U.S. parent.

A) $0.00
B) $600,000
C) $405,000
D) $250,000

Question 52

Johnson Worldwide Aeronautics Inc., headquartered in the United States, is attempting to reduce the firm's consolidated total income taxes. The firm has just made a sale of parts to their affiliate in Lithuania, a country that has a corporate income tax rate of 15%. If the United States has a corporate income tax rate of 35%, which of the following transfer pricing strategies should Johnson attempt to follow?

A) Comparable parts were sold to a subsidiary in the United States for $1,000,000, therefore, Johnson should price the parts for $1,000,000.
B) If Johnson made an individual stand-alone sale of these parts on the open market the estimated price is $1,250,000. Therefore, this should be Johnson's price.
C) If Johnson were to allocate full costs including overhead and a reasonable profit on the sale, they could charge a total of $1,500,000. Therefore this should be Johnson's price.
D) Johnson's price to its affiliate makes no difference; the consolidated income taxes will be the same regardless of the transfer pricing technique used by the firm.

Question 53

________ is NOT an "arm's length price" method of determining transfer prices among parent and affiliated firms.

A) Comparable uncontrolled price method
B) Resale price method
C) Cost-plus method
D) All of the above are acceptable methods.

Question 54

What is a value-added tax? Where is this type of tax in wide usage? Why do you suppose this form of taxation has not been widely accepted in the United States?

Question 55

Among the G7 nations, the U.S. has a below average corporate income tax rate that makes it attractive for other countries to invest in the U.S.

Question 56

TABLE 14.1
Uses the information to answer the following question(s).
MetroCity Designs Inc., located in Northern California, has two international subsidiaries, one located in the Ukraine, the other in Korea. Consider the information below to answer the next several questions.

Refer to Table 14.1. If MetroCity set the payout rate from the Ukraine subsidiary at 25%, how should MetroCity set the payout rate of the Korean subsidiary (approximately) to more efficiently manage its total foreign tax bill?

A) 28.5%
B) 24.5%
C) 42.6%
D) 82.3%

Question 57

TABLE 14.1
Uses the information to answer the following question(s).
MetroCity Designs Inc., located in Northern California, has two international subsidiaries, one located in the Ukraine, the other in Korea. Consider the information below to answer the next several questions.

Refer to Table 14.1. How much in additional U.S. taxes would be due if MetroCity averaged the tax credits and liabilities of the two foreign units, assuming a 50% payout rate from each?

A) $3,750
B) $13,750
C) $2,500
D) $0

Question 58

The typical tax-haven subsidiary owns the common stock of its related operating foreign subsidiaries.

Question 59

Trident Germany paid 28% corporate income tax and declared dividend to its US parent. The corporate tax rate in US is 35%.

A) Dividends remitted to US parent result in excess foreign tax credit
B) Dividends remitted to US parent result in deficit foreign tax credit.
C) Dividends remitted to US parent are not subject to withholding tax because US tax rate is higher.
D) US parent does not pay taxes on income earned outside of US.

Question 60

For U.S. MNEs, the tax-deferral privilege operating through a foreign subsidiary was not originally a tax loophole. On the contrary, it was granted by the U.S. government to allow U.S. firms to expand overseas and place them on a par with foreign competitors, that also enjoy similar types of tax deferral and export subsidies of one type or another.

Question 61

Many MNEs have foreign subsidiaries that act as tax havens for corporate funds awaiting reinvestment or repatriation. Tax-haven subsidiaries, categorically referred to as International Offshore Financial Centers, are partially a result of tax-deferral features on earned foreign income allowed by some of the parent countries. Tax-haven subsidiaries are typically established in a country that can meet four basic requirements: List and define these requirements.