Deck 16: International Tax Planning

Question 1

Which of the following statements is most correct?

A) Most, if not all, countries charge income taxes on corporate income because economic theory suggests that this form of taxation does not adversely affect overall growth of an economy.
B) The European Union uses a value-added tax (VAT) whereby a tax is levied at each stage of production on the value added in that stage.
C) Income earned by residents of one country from passive investments made in other countries is generally subject to tax where the income is earned as well as in the home country. The country where it is earned often collects this tax in the form of a withholding tax.
D) All of the statements above are correct.
E) Only statements b and c are correct.

Answer 1

Only statements b and c are correct.

Question 2

A tax haven country is one that has all except which of the following characteristics?

A) Low tax rates on income from foreign investments earned by resident corporations and a low withholding rate on dividend transfers to foreign owners.
B) Independence of foreign-owned service facilities from the local economy so that an unstable business environment will have no impact on foreign-owned operations that have no transactions with local people or companies.
C) An infrastructure that supports sophisticated financial services, including advanced telecommunications and computer capabilities, highly trained professional office workers, and financial institutions of unquestioned strength and integrity.
D) A stable financial system and currency that permits resident companies to engage in transactions and maintain accounts in many different currencies and to move from one currency to another one easily, inexpensively, and quickly.
E) All of the statements above are characteristics of tax havens.

Answer 2

Independence of foreign-owned service facilities from the local economy so that an unstable business environment will have no impact on foreign-owned operations that have no transactions with local people or companies.

Question 3

Which of the following statements is most correct?

A) Capital export neutrality (CEN), sometimes called domestic neutrality, suggests that investors should pay exactly the same total amount of taxes on income from foreign investments as they do on income from domestic investments.
B) Capital import neutrality (CIN), or foreign neutrality, suggests that investments in any country should be taxed at the same rate no matter where the investor resides.
C) France and Germany embrace capital import neutrality while the U.S. follows capital export neutrality.
D) All of the statements above are correct.
E) Only statements a and c are correct.

Answer 3

All of the statements above are correct.

Question 4

One of the most important distinctions in international taxation is between active and passive income. Which of the following statements about these types of income is incorrect?

A) Taxation of passive income is generally accomplished by applying a withholding tax rate to the gross amount of income and then only when it is transferred out of the country.
B) Taxation of active income is generally accomplished by applying a tax rate to the net amount of income (revenues minus expenses) and then only when the income is transferred out of the country.
C) The tax rate applicable to active income is often higher than the withholding rate on passive income.
D) Passive investment income consists of such things as dividends, interest, royalty income from securities, and the licensing of intangible assets.
E) Statements c and d are correct.

Question 5

Tax treaties between countries are important to MNEs because they

A) Usually eliminate or reduce the tax rate applicable to passive income subject to tax.
B) Almost always restrict taxes on active income imposed by the host country to situations where the foreign corporation is engaging in a trade or business through a permanent establishment located in that country.
C) Generally take precedence over local tax codes and regulations.
D) Only statements a and b are correct.
E) Statements a, b, and c are correct.

Question 6

"Treaty shopping" is a term that applies to which of the following situations?

A) An MNE includes as part of the country attractiveness scorecard a requirement that the country have a signed tax treaty with the home country.
B) Companies engage in passive operations only in countries where a tax treaty allows them to negotiate a zero withholding rate.
C) An MNE redirects transactions through its internal corporate network so as to benefit from tax treaty relationships between subsidiaries when the home country government has no direct tax treaty with the country of the subsidiary on the other side of the transaction.
D) All of the statements above are correct.
E) Only statements a and c are correct.

Question 7

In the U.S., permanent deferral or reduction of U.S. tax is possible only in which of the following situations?

A) Income is earned from sources located in one of the U.S. possessions such as Guam or Puerto Rico during 2005.
B) Income is earned on goods produced in the U.S. but exported to other countries during 2004.
C) Income is earned in a foreign subsidiary but will not be repatriated to the U.S. for more than five years.
D) Both statements a and b are correct.
E) Both statements a and c are correct.

Question 8

The U.S. Internal Revenue Code contains many provisions that limit the ability of individuals and corporations to defer the payment of taxes on foreign-source income. One of the most significant of these provisions is that restrictions are placed on controlled foreign corporations (CFCs), and in particular on "Subpart F income." Which of the following statements about subpart F income is/are incorrect?

A) Subpart F income is income that is easily shifted from one foreign location to another or has little or no economic connection to the CFC's country of origin.
B) Passive income, such as interest or dividends earned by owning financial securities, and rents and royalties from intangible property, is always considered to be subpart F income.
C) Sales income, whether either production of the goods or the final customers to whom they are sold are located in the CFC's home country and neither the supplier of the goods nor the customer is related to the CFC, is always considered to be subpart F income.
D) All of the statements above are correct.
E) Both statements b and c are incorrect.

Question 9

The U.S. Internal Revenue Code permits MNEs to claim foreign tax credits (FTCs) to some extent. However, there are specific limits. Which of the following statements is accurate about these limits?

A) In any tax year, the allowed FTC is restricted to the amount of U.S. tax imposed on the foreign-source income that is included on the U.S. tax return.
B) The deemed-paid credit is a direct credit for foreign taxes paid if the parent receives actual or constructive dividends from a subsidiary.
C) If the foreign operation is organized as a branch instead of as a subsidiary, then only an indirect tax credit is available to offset taxes on the branch's earnings.
D) All of the statements above are correct.
E) Only statements a and b are correct.

Question 10

So-called "check-the-box" regulations allow MNEs to

A) Elect whether to treat foreign business entities with a single U.S. owner as corporations or unincorporated branches for U.S. tax purposes regardless of their legal form of ownership.
B) Treat subpart F income from a foreign subsidiary as income of the parent for tax purposes.
C) Permanently defer taxes on active income.
D) All of the statements above are correct.
E) Only statements a and b are correct.

Question 11

Reyes Corp. generated $1 million of income from domestic operations and an additional $300,000 from its only foreign subsidiary. Its tax rate is 35 percent on domestic income and 30 percent on foreign income. If Reyes' home country observes the capital export neutrality approach to taxation, what net dividend will Reyes receive from its subsidiary?

A) $105,000
B) $135,000
C) $155,000
D) $175,000
E) $195,000

Question 12

Benik Industries generated $2 million of income from domestic operations and an additional $700,000 from its only foreign subsidiary. Its tax rate is 30 percent on domestic income and 35 percent on foreign income. If Benik's home country observes the capital export neutrality approach to taxation, what net dividend will Benik receive from its subsidiary?

A) $210,000
B) $280,000
C) $360,000
D) $400,000
E) $455,000

Question 13

In Farrah Tech's current setup, it will generate $2,000,000 in sales next year and $1,100,000 in cost of goods sold (its only expense, besides taxes, in this example). The firm's tax rate is 40 percent. Farrah's CFO is considering a subsidiary in the Cayman Islands (where there are no corporate taxes). If Farrah sold the same goods to the Cayman Island subsidiary at $1,400,000, how much would Farrah save in taxes?

A) $120,000
B) $160,000
C) $200,000
D) $240,000
E) $300,000

Question 14

Magellan Shipping generated $2.5 million of income from domestic operations and an additional $1.1 million from its only foreign subsidiary. Its tax rate is 35 percent on domestic income and 30 percent on foreign income. Compare the capital export and import neutrality methods of taxation. Which method requires the most in total taxes paid (by both units), and by how much?

A) CEN; $55,000
B) CEN; $75,000
C) Both methods require the same payment of taxes.
D) CIN; $55,000
E) CIN; $75,000

Question 15

Johnson Trailers generated $1.5 million of income from domestic operations and an additional $880,000 from its only foreign subsidiary. Its tax rate is 30 percent on domestic income and 35 percent on foreign income. Compare the capital export and import neutrality methods of taxation. Which method requires the most in total taxes paid (by both units), and by how much?

A) CEN; $45,000
B) CEN; $18,000
C) Both methods require the same payment of taxes.
D) CIN; $18,000
E) CIN; $45,000

Question 16

If a firm is considering setting up a subsidiary in a tax haven, what are some characteristics to look for in the country?

Question 17

Compare and contrast capital export neutrality and capital import neutrality.

Question 18

Differentiate between passive investment income and income from active business operations.

Question 19

Identify three forms of tax assistance provided to MNEs by tax treaties.

Question 20

Identify and explain the two provisions in the Tax Code for permanent deferral or reduction of U.S. taxes.