Question 1

San Carlos Corporation, a U.S. multinational, had pretax U.S. source income and foreign source income as follows.
Corporate tax rate schedule.
U.S. source income $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$ 400,000
Foreign source income-Country W $\quad$  300,000
Total $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$ 700,000
San Carlos paid $60,000 income tax to Country W. Calculate San Carlos' tax savings if it takes a foreign tax credit rather than deducting this tax.

Accepted Answer

Deduction would save $12,600 in tax ($60,000 × 21% marginal tax rate). Credit saves $00,000 in tax, so additional savings is $47,400.

Question 2

Which of the following statements about income tax treaties is false?

Accepted Answer

Income tax treaties generally aim to avoid double taxation and prevent tax evasion, and they include specific rules for taxing rights and the elimination of double taxation. The allocation of a firm's profits under treaties does not typically follow the Uniform Division of Income for Tax Purposes Act (UDITPA) formula, which is more relevant to the apportionment of income among states within the United States, not between countries.

Question 3

Albany, Inc. does business in states C and D. State C uses an apportionment formula that double-weights the sales factor; state D apportions income using an equally-weighted three-factor formula. Albany's before tax income is $3,000,000, and its sales, payroll, and property factors are as follows.
Calculate Albany's income taxable in each state.

Accepted Answer

C taxable income = $3 million × (50% × 2 + 40% + 20%)/4; D taxable income = $3 million × (50% + 60% + 80%)/3.
 $$\begin{array} { l c c c c } 
& \mathrm { C } & & \mathrm { D } & \
\text { Sales factor } & 50 & \% & 50 & \% \
\text { Payroll factor } & 40 & \% & 60 & \% \
\text { Property factor } & 20 & \% & 80 & \%
\end{array}$$

Question 4

Jovar Inc., a U.S. multinational, began operations this year. Jovar had pretax U.S. source income and foreign source income as follows.
Corporate tax rate schedule.
U.S. source income $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ $ 600,000
Foreign source income-Country O $\quad$$\quad$$\quad$ 100,000
Total$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ $ 700,000
Jovar paid $50,000 income tax to Country O. Compute Jovar's U.S. tax liability if it takes the foreign tax credit.

Accepted Answer

Pre-credit U.S. tax = $147,000. Credit is limited to $147,000 × 100k/700k = $34,000.

Question 5

Fleming Corporation, a U.S. multinational, has pretax U.S. source income and foreign source income as follows.
Corporate tax rate schedule.
U.S. source income $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ $ 1,000,000
Foreign source income-Country A $\quad$$\quad$$\quad$$\quad$500,000
Total $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$ 1,500,000
-Fleming paid $200,000 income tax to Country A. If Fleming takes the foreign tax credit, compute its worldwide tax burden as a percentage of its pretax income.

Accepted Answer

U.S. tax before FTC = $315,000. FTC = $105,000 (limited), so U.S. tax after FTC = $210,000. Worldwide tax = $515,000.

Question 6

Which of the following taxes is eligible for the foreign tax credit?

Accepted Answer

Only income taxes assessed by a foreign government are eligible for the foreign tax credit. Property taxes (A) and sales taxes (D) are not eligible, and value-added taxes (B) on inventory are considered part of the cost of goods sold and are deductible as a business expense.

Question 7

Which of the following statements about the foreign tax credit is true?

Accepted Answer

The foreign tax credit allows U.S. corporations to offset their U.S. tax liability on foreign source income by the amount of foreign income taxes paid, up to the amount of U.S. tax that would have been paid on that income. This means that the U.S. still has taxing jurisdiction on foreign source income earned by U.S. corporations, but allows for relief from double taxation. The foreign tax credit is not available to foreign corporations doing business in the U.S. and is allowed for many but not all types of foreign taxes.

Question 8

Fleming Corporation, a U.S. multinational, has pretax U.S. source income and foreign source income as follows.
Corporate tax rate schedule.
U.S. source income $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ $ 1,000,000
Foreign source income-Country A $\quad$$\quad$$\quad$$\quad$500,000
Total $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$ 1,500,000
-Fleming paid $50,000 income tax to Country A. If Fleming takes the foreign tax credit, compute its worldwide tax burden as a percentage of its pretax income.

Accepted Answer

U.S. tax before FTC = $315,000. FTC = $50,000 (not limited), so U.S. tax after FTC = $265,000. Worldwide tax = $315,000.

Question 9

Global Corporation, a U.S. multinational, began operations this year. Global had pretax U.S. source income and foreign source income as follows.
Corporate tax rate schedule.
U.S. source income $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$ 700,000
Foreign source income-Country X $\quad$$\quad$100,000
Total $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$ 800,000
Global paid $15,000 income tax to Country X. What is Global's U.S. tax liability if it takes the foreign tax credit?

Accepted Answer

Pre-credit tax is $168,000. Credit limited to tax paid since the foreign rate is <34%.

Question 10

Albany, Inc. does business in states C and D. State D uses an apportionment formula that double-weights the sales factor; state C apportions income using an equally-weighted three-factor formula. Albany's before tax income is $3,000,000, and its sales, payroll, and property factors are as follows.
Calculate Albany's income taxable in each state.

Accepted Answer

C taxable income = $3 million × (50% + 40% + 20%)/3; D taxable income = $3,000,000 × (50% × 2 + 60% + 80%)/4.
 $$\begin{array} { l c c c c } 
& \text { C } & & \text { D } & \
\text { Sales factor } & 50 & \% & 50 & \% \
\text { Payroll factor } & 40 & \% & 60 & \% \
\text { Property factor } & 20 & \% & 80 & \%
\end{array}$$

Question 11

Many Mountains, Inc. is a U.S. multinational corporation. This year, it had the following income.
Corporate tax rate schedule.
Many Mountains paid $15,000 income tax to Country X and $18,500 income tax to Country Y. Compute Many Mountains' allowable foreign tax credit.

Accepted Answer

U.S. tax before FTC = $750,000 × 21% = $157,500. FTC Limit = $157,500 × 170/750 = $35,700; Total creditable foreign taxes = $33,500 ($15,000 + $18,500). Credit = Lesser of $33,500 or $35,700.
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Question 12

Which of the following statements concerning the taxation of a U.S. multinational corporation is true?

Accepted Answer

The answer of Which of the following statements concerning the...

Question 13

World Sales, Inc., a U.S. multinational, had pretax U.S. source income and foreign source income as follows.
Corporate tax rate schedule.
U.S. source income $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ $ 500,000
Foreign source income-Country O $\quad$$\quad$200,000
Total $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$ 700,000
World Sales paid $50,000 income taxes to Country O. What is World Sale's U.S. tax liability if it deducts the foreign taxes paid?

Accepted Answer

($700,000 - $50,000) × 21%.

Question 14

Which of the following statements about the foreign tax credit limitation is false?

Accepted Answer

Foreign tax credits in excess of the limit can be carried forward for up to 10 years, not indefinitely.

Question 15

Southern, an Alabama corporation, has a $7 million excess FTC carryforward attributable to its foreign branch manufacturing operations. Which of the following strategies should increase Southern's use of its FTC carryforward to reduce U.S. tax?

Accepted Answer

By opening a branch manufacturing operation in a foreign country with a lower corporate income tax rate than the U.S., Southern can generate more foreign taxes paid that can be used to offset its U.S. tax liability. Therefore, opening a branch in a foreign country with a 17% corporate income tax rate would likely increase Southern's use of its FTC carryforward, as compared to opening a branch in a country with a higher tax rate (B) or repatriating foreign source income (C).

Question 16

Jenkin Corporation reported the following for its first two taxable years. Corporate tax rate schedule. Assume that the tax rates for both the years are the same.
Calculate Jenkin's U.S. tax liability for Year 2.

Accepted Answer

Year 1 FTC $42,000 (calculated as $147,000 tax × ($200,000/700,000), resulting in a carryforward of $28,000 (Foreign tax paid Year 1 $80,000 - $42,000 Year 1 FTC).
Year 2 Tax before credit = $210,000. FTC = $50,000 + $28,000 carryforward from year 1.
 $$\begin{array} { l r r r r } 
& \text { Year 1 } & & \text { Year 2 } \
\text { U.S. source income } & \$ 500,000 & & \$ & 600,000 \
\text { Foreign source income } & 200,000 & & 400,000 \
 \text { Taxable income } & \$ 700,000 & & \$ 1,000,000 \
 \text { Foreign tax paid } & \$ 80,000 & & \$ & 50,000
\end{array}$$

Question 17

Which of the following would qualify as a permanent establishment for income tax treaty purposes?

Accepted Answer

Only the maintenance of a sales office in the host country would qualify as a permanent establishment for income tax treaty purposes. The presence of corporate employees for a limited time period and shipment of goods to customers in the host country do not typically meet the threshold requirements for establishing a permanent establishment.

Question 18

Mega, Inc., a U.S. multinational, has pretax U.S. source income and foreign source income as follows.
Corporate tax rate schedule
U.S. source income $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$ 760,000
Foreign source income-Country M $\quad$$\quad$$\quad$80,000
Total $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$ 840,000
Mega paid $15,000 income tax to Country M. Mega has a $25,000 foreign tax credit carryforward. What is Mega's U.S. tax liability if it takes the foreign tax credit?

Accepted Answer

U.S. tax before credit = $840,000 × 21% = $176,400. Credit limited to $176,400 × $80,000/$840,000, or $16,800; total available credit is $40,000, so final tax is $176,400 -$16,800 = $159,600.

Question 19

Pennworth Corporation operates in the United States and foreign country M. Its domestic subsidiary Delco, Inc. operates in foreign country N. This year, the two corporations report the following.
Corporate tax rate schedule
If Pennworth and Delco file a consolidated U.S. tax return, compute consolidated income tax liability.

Accepted Answer

Taxable income = $5,000,000. Tax before credits = $1,050,000. FTC = $400,000 (no limit because of cross-crediting).
 $$\begin{array} { l r r l } 
& & \text { Foreign } & \text { Foreign } \
& \text { U.S. Source } & \text { Source } & \text { Income } \
& \text { Income } & \text { Income } & \text { Tax Paid } \
\text { Pennworth } & \$ 3,000,000 & \$ 1,000,000 & \$ 300,000 \
\text { Delco } & 0 & 1,000,000 & 100,000
\end{array}$$

Question 20

Cambridge, Inc. conducts business in states X and Y. This year, its before-tax income was $150,000. Below is information regarding its sales, payroll, and property factors in both states.
Both states apply an equally-weighted three-factor formula to apportion income. State X has a 10% corporate income tax and state Y has a 5% corporate income tax. Compute the state tax savings if Cambridge could relocate $100,000 of property and $50,000 of payroll from state X to state Y.

Accepted Answer

By relocating $100,000 of property and $50,000 of payroll from state X to state Y, Cambridge reduces its tax liability in the higher-tax state (X) and increases it in the lower-tax state (Y). The savings is calculated by the difference in tax rates applied to the change in apportionment.

Quiz 13: Jurisdictional Issues in Business Taxation