International Taxation Complete Test Bank Chapter 8

International Accounting, 5e (Doupnik)

Chapter 8 International Taxation

1) What is the optimal tax objective for multinational corporations?

A) Minimize domestic taxes paid on worldwide income

B) Minimize worldwide taxes paid, within the limitations of applicable tax law

C) Minimize the credit for worldwide taxes paid

D) Minimize foreign taxes

Difficulty: 1 Easy

Topic: Types of Taxes and Tax Rates

Learning Objective: 08-01 Describe differences in corporate income tax and withholding tax regimes across countries.

Bloom's: Remember

AACSB: Knowledge Application

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2) There are two major 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?

A) Excise tax

B) Payroll tax

C) Withholding tax

D) Value-added tax

Difficulty: 1 Easy

Topic: Types of Taxes and Tax Rates

Learning Objective: 08-01 Describe differences in corporate income tax and withholding tax regimes across countries.

Bloom's: Analyze

AACSB: Knowledge Application

Accessibility: Keyboard Navigation

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

A) Harmonization of accounting standards

B) Competition for foreign investment

C) Currencies pegged to another country's currency

D) None of the above

Difficulty: 1 Easy

Topic: Types of Taxes and Tax Rates

Learning Objective: 08-01 Describe differences in corporate income tax and withholding tax regimes across countries.

Bloom's: Analyze

AACSB: Knowledge Application

Accessibility: Keyboard Navigation

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

A) tax holidays.

B) tax shelters.

C) tax havens.

D) tax centers.

Difficulty: 1 Easy

Topic: Tax Havens

Learning Objective: 08-01 Describe differences in corporate income tax and withholding tax regimes across countries.

Bloom's: Remember

AACSB: Knowledge Application

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5) What is a tax haven?

A) A jurisdiction where taxes are abnormally low

B) A location where tax cheats live to escape prosecution

C) A tax jurisdiction where world-wide tax is eliminated

D) Locations that provide tax-based incentives to corporations

Difficulty: 1 Easy

Topic: Tax Havens

Learning Objective: 08-01 Describe differences in corporate income tax and withholding tax regimes across countries.

Bloom's: Apply

AACSB: Knowledge Application

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6) What is a withholding tax?

A) Income tax paid on corporate earnings.

B) An amount subtracted from a dividend payout and remitted to the government.

C) This is an income tax corporations pay to local governments in addition to the national income tax.

D) Taxes that lower the effective tax rate in a country.

Difficulty: 1 Easy

Topic: Withholding Taxes

Learning Objective: 08-01 Describe differences in corporate income tax and withholding tax regimes across countries.

Bloom's: Remember

AACSB: Knowledge Application

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7) 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 an MNC have for using this investment strategy?

A) Interest is generally a deductible expense, whereas dividends paid are not.

B) Dividends require a cash outflow but interest does not.

C) Cash flows from dividends must be discounted using the cost of capital, which is not the case for interest.

D) All of the above

Difficulty: 1 Easy

Topic: Withholding Taxes

Learning Objective: 08-01 Describe differences in corporate income tax and withholding tax regimes across countries.

Bloom's: Apply

AACSB: Knowledge Application

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8) What is meant by the term "thin capitalization?"

A) Undervaluing foreign investments

B) Using as little debt financing as a country will allow

C) Minimizing the amount of equity capital used to fund foreign operations

D) Creating transparency in the methods used to fund foreign operations

Difficulty: 2 Medium

Topic: Withholding Taxes

Learning Objective: 08-01 Describe differences in corporate income tax and withholding tax regimes across countries.

Bloom's: Apply

AACSB: Knowledge Application

Accessibility: Keyboard Navigation

9) What is a value added tax (VAT)?

A) It is the European version of a sales tax, which is paid by the purchaser based on sales price.

B) Taxes used in lieu of sales tax and incorporated into the price of a product or service.

C) The tax paid by a foreign corporation on its fixed assets.

D) This is the name of the corporate income tax in Canada, Australia, and the United Kingdom.

Difficulty: 1 Easy

Topic: Value-Added Tax

Learning Objective: 08-01 Describe differences in corporate income tax and withholding tax regimes across countries.

Bloom's: Apply

AACSB: Knowledge Application

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10) 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 on purchase from Aco Ltd.

A) FC 200,000

B) FC 500,000

C) FC 300,000

D) FC 800,000

Difficulty: 2 Medium

Topic: Value-Added Tax

Learning Objective: 08-01 Describe differences in corporate income tax and withholding tax regimes across countries.

Bloom's: Apply

AACSB: Analytical Thinking

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11) How is a foreign subsidiary different from a foreign branch of a domestic corporation?

A) Subsidiaries always generate more foreign source income than branches do.

B) The subsidiary is a company incorporated in the foreign country, whereas a branch is not a separate corporation.

C) A subsidiary is created to manufacture and distribute products in foreign markets, whereas a branch's only function is sales in the foreign market.

D) The income of a subsidiary is taxable by the country where it is located, but branch income is not subject to tax by the country where it does business.

Difficulty: 1 Easy

Topic: Value-Added Tax

Learning Objective: 08-01 Describe differences in corporate income tax and withholding tax regimes across countries.

Bloom's: Apply

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

12) Under the citizenship approach of tax jurisdiction, if Company A, incorporated in Country X, was based in Country Y and earned dividends in Country Z, the dividends would be ultimately taxed in which country?

A) Country Z

B) Country Y

C) Country X

D) None of the above, based on tax neutrality

Difficulty: 2 Medium

Topic: Tax Jurisdiction

Learning Objective: 08-01 Describe differences in corporate income tax and withholding tax regimes across countries.

Bloom's: Apply

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

13) Which of the following affect the effective corporate tax rate?

A) Tax-based incentives

B) Local corporate tax rate

C) Method of determining taxable income

D) All of the above

Difficulty: 1 Easy

Topic: Worldwide versus Territorial Approach

Learning Objective: 08-02 Explain how overlapping tax jurisdictions cause double taxation.

Bloom's: Remember

AACSB: Knowledge Application

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

A) Taxes have a negative effect on cash flows from the investment.

B) Taxes determine the rate used in calculating the discounted cash flows.

C) Taxes affect the amount of depreciation that will be recorded on the investment.

D) All of the above

Difficulty: 1 Easy

Topic: Worldwide versus Territorial Approach

Learning Objective: 08-02 Explain how overlapping tax jurisdictions cause double taxation.

Bloom's: Remember

AACSB: Knowledge Application

Accessibility: Keyboard Navigation

15) 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?

A) Nationality approach

B) Worldwide approach

C) Legalistic approach

D) Territorial approach

Difficulty: 2 Medium

Topic: Worldwide versus Territorial Approach

Learning Objective: 08-02 Explain how overlapping tax jurisdictions cause double taxation.

Bloom's: Apply

AACSB: Knowledge Application

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16) 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?

A) Territorial approach

B) Worldwide approach

C) Legalistic approach

D) None of the above

Difficulty: 2 Medium

Topic: Worldwide versus Territorial Approach

Learning Objective: 08-02 Explain how overlapping tax jurisdictions cause double taxation.

Bloom's: Apply

AACSB: Knowledge Application

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

A) operating income.

B) exempt income.

C) foreign source income.

D) taxable income.

Difficulty: 1 Easy

Topic: Worldwide versus Territorial Approach

Learning Objective: 08-02 Explain how overlapping tax jurisdictions cause double taxation.

Bloom's: Apply

AACSB: Knowledge Application

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

A) Citizenship only

B) Residence only

C) Both citizenship and residence

D) None of the above

Difficulty: 2 Medium

Topic: Source, Citizenship, and Residence

Learning Objective: 08-02 Explain how overlapping tax jurisdictions cause double taxation.

Bloom's: Apply

AACSB: Knowledge Application

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

A) Tax is imposed on the foreign subsidiary income in the year it is earned.

B) Tax is paid on the foreign subsidiary's income when the profits are returned to the U.S. parent as dividends.

C) The government of the U.S. does not tax foreign source income.

D) Tax credits for losses incurred by the foreign subsidiary are recognized by the parent currently, but taxes on profits are deferred until dividends are paid.

Difficulty: 2 Medium

Topic: Source, Citizenship, and Residence

Learning Objective: 08-02 Explain how overlapping tax jurisdictions cause double taxation.

Bloom's: Apply

AACSB: Knowledge Application

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20) What is the U.S. policy concerning taxing income of a foreign branch of a U.S. corporation?

A) Tax is imposed on the foreign branch income in the year it is earned.

B) Tax is paid on the foreign branch's income when the profits are returned to the U.S. parent as dividends.

C) The government of the U.S. does not tax foreign source income.

D) Tax credits for losses incurred by the foreign branch are recognized by the parent currently, but taxes on profits are deferred until dividends are paid.

Difficulty: 1 Easy

Topic: Source, Citizenship, and Residence

Learning Objective: 08-02 Explain how overlapping tax jurisdictions cause double taxation.

Bloom's: Apply

AACSB: Knowledge Application

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21) Under U.S. tax law, what is a "resident?"

A) A person living in the United States for 183 days or more in a year

B) A person holding a "green card" from the U.S. Immigration and Naturalization Service

C) A corporation organized in the United States

D) All of the above

Difficulty: 1 Easy

Topic: Source, Citizenship, and Residence

Learning Objective: 08-02 Explain how overlapping tax jurisdictions cause double taxation.

Bloom's: Understand

AACSB: Knowledge Application

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22) What causes double taxation?

A) A taxpayer being subject to tax laws in multiple jurisdictions

B) Profits increasing excessively from year to year

C) Penalties imposed by a taxing authority for non-payment of taxes

D) None of the above

Difficulty: 1 Easy

Topic: Double Taxation

Learning Objective: 08-02 Explain how overlapping tax jurisdictions cause double taxation.

Bloom's: Understand

AACSB: Knowledge Application

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23) In general, why do countries wish to avoid double taxation on corporations?

A) The calculations of the taxes are excessively complex.

B) It discourages foreign direct investment.

C) Enforcement of the tax law becomes excessively burdensome.

D) It contributes to accounting diversity.

Difficulty: 2 Medium

Topic: Double Taxation

Learning Objective: 08-02 Explain how overlapping tax jurisdictions cause double taxation.

Bloom's: Analyze

AACSB: Knowledge Application

Accessibility: Keyboard Navigation

24) What is the meaning of "tax system neutrality?"

A) Taxes should be minimized.

B) Tax systems should not be a major factor in business decisions.

C) Tax policies should be unbiased.

D) Taxes in one jurisdiction are offset by tax credits in another jurisdiction.

Difficulty: 1 Easy

Topic: Double Taxation

Learning Objective: 08-02 Explain how overlapping tax jurisdictions cause double taxation.

Bloom's: Analyze

AACSB: Knowledge Application

Accessibility: Keyboard Navigation

25) What term is used for the characteristic of a tax system whereby a company's decisions to invest domestically or abroad is not affected by taxation?

A) Foreign tax credit

B) Unbiased

C) Capital export neutrality

D) Capital investment irrelevance

Difficulty: 1 Easy

Topic: Double Taxation

Learning Objective: 08-02 Explain how overlapping tax jurisdictions cause double taxation.

Bloom's: Analyze

AACSB: Knowledge Application

Accessibility: Keyboard Navigation

26) What is a tax holiday?

A) A trip made to tax havens to buy goods free of sales tax.

B) The time between the date of filing the corporate income tax return and the date when taxes are due to be paid.

C) This is a period of time when corporations are relieved of paying various taxes.

D) This is the deadline for filing federal tax returns.

Difficulty: 1 Easy

Topic: Types of Taxes and Tax Rates

Learning Objective: 08-01 Describe differences in corporate income tax and withholding tax regimes across countries.

Bloom's: Remember

AACSB: Knowledge Application

Accessibility: Keyboard Navigation

27) What is the international norm for determining tax jurisdiction?

A) Residence takes precedence over source

B) Citizenship takes precedence over residence

C) Source takes precedence over residence

D) Domestic takes precedence over foreign

Difficulty: 1 Easy

Topic: Tax Jurisdiction

Learning Objective: 08-05 Show how foreign tax credits reduce the incidence of double taxation.

Bloom's: Apply

AACSB: Knowledge Application

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28) How might a parent company's home country eliminate double taxation on foreign source income?

A) Tax credits for taxes paid to foreign countries

B) Tax deductions for taxes paid to foreign countries

C) Taking a territorial approach to taxing income

D) All of the above

Difficulty: 2 Medium

Topic: Tax Jurisdiction

Learning Objective: 08-05 Show how foreign tax credits reduce the incidence of double taxation.; 08-04 Demonstrate how the participation exemption system and rules related to controlled foreign corporations, Subpart F income, and foreign tax credit baskets affect U.S. taxation of foreign source income.

Bloom's: Apply

AACSB: Knowledge Application

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29) In following the international norm concerning tax jurisdiction, how would double taxation be eliminated?

A) The subsidiary's home country would allow tax credits for taxes paid to the parent's home country.

B) The parent company's home country would allow tax credits for taxes paid to the subsidiary's home country.

C) The home countries of both the parent and the subsidiary would forego taxation on the income earned by the subsidiary.

D) None of the above

Difficulty: 3 Hard

Topic: Tax Jurisdiction

Learning Objective: 08-05 Show how foreign tax credits reduce the incidence of double taxation.; 08-04 Demonstrate how the participation exemption system and rules related to controlled foreign corporations, Subpart F income, and foreign tax credit baskets affect U.S. taxation of foreign source income.

Bloom's: Evaluate

AACSB: Knowledge Application

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30) Under U.S. tax laws, how are taxes paid by U.S. corporations to foreign governments treated?

A) Total domestic taxes paid in U.S. are deductions in calculating taxable income.

B) Domestic income taxes owed are credits against U.S. taxes owed.

C) Taxpayers may choose to deduct total foreign taxes paid or take credit for foreign income taxes.

D) None of the above

Difficulty: 1 Easy

Topic: Tax Treaties

Learning Objective: 08-04 Show how foreign tax credits reduce the incidence of double taxation.; 08-05 Describe some of the benefits provided by tax treaties.

Bloom's: Apply

AACSB: Knowledge Application

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31) Under what condition may it be to the taxpayer's advantage to take a deduction for total foreign taxes paid rather than a tax credit for foreign income taxes?

A) If the foreign income tax rate is greater than the U.S. federal income tax rate

B) If the foreign income tax rate is less than the U.S. federal income tax rate

C) If foreign source income is less than domestic income

D) If foreign taxes other than income taxes are substantial

Difficulty: 2 Medium

Topic: Tax Treaties

Learning Objective: 08-04 Show how foreign tax credits reduce the incidence of double taxation.; 08-05 Describe some of the benefits provided by tax treaties.

Bloom's: Apply

AACSB: Knowledge Application

Accessibility: Keyboard Navigation

32) An indirect foreign tax credit arises when:

A) taxes paid by a parent on foreign branch income is deducted from taxes owed to the parent's home country.

B) taxes paid by a foreign subsidiary are taken as a credit against a parent's taxes when dividends are received from the subsidiary.

C) taxing jurisdictions agree to share the taxes paid by a foreign subsidiary.

D) a foreign taxing jurisdiction does not tax a subsidiary within its jurisdiction and allows the parent country to tax the foreign source income.

Difficulty: 2 Medium

Topic: Foreign Tax Credits

Learning Objective: 08-05 Show how foreign tax credits reduce the incidence of double taxation.

Bloom's: Apply

AACSB: Knowledge Application

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33) Under U.S. tax law, what is the basis for the overall foreign tax credit limitation?

A) To make sure that foreign governments get their fair share of a foreign subsidiary's income

B) To ensure that the foreign tax credit taken by a corporation does not exceed the actual foreign tax it paid

C) To make sure that the foreign tax credit taken by a corporation does not exceed the amount of taxes the foreign affiliate would have paid in the U.S.

D) To minimize world-wide taxes on the U.S. corporation

Difficulty: 2 Medium

Topic: Foreign Tax Credits

Learning Objective: 08-05 Show how foreign tax credits reduce the incidence of double taxation.

Bloom's: Apply

AACSB: Knowledge Application

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34) A U.S. corporation is subject to an income tax rate of 35% and has a branch in the U.K., which paid the national corporate tax rate of 30% on its earnings there. The branch generated taxable income from operations in the U.K. equivalent to $2,000,000. What is the amount of the taxes owed to the U.S. government on the income generated in the U.K.?

A) $600,000

B) $700,000

C) $100,000

D) $0

Difficulty: 2 Medium

Topic: U.S. Tax Treatment of Foreign Operation Income

Learning Objective: 08-05 Show how foreign tax credits reduce the incidence of double taxation.

Bloom's: Analyze

AACSB: Analytical Thinking

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35) A Japanese branch of a U.S. corporation paid $4,200,000 in taxes to the government of Japan on income it generated there. The corporation is subject to a 35% tax rate in the U.S.

How much foreign tax credit can be taken in calculating the taxes owed to the U.S. on $10,000,000 of Japanese branch income?

A) $4,200,000

B) $3,500,000

C) $0

D) $7,000,000

Difficulty: 2 Medium

Topic: Foreign Tax Credits

Learning Objective: 08-05 Show how foreign tax credits reduce the incidence of double taxation.

Bloom's: Analyze

AACSB: Analytical Thinking

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36) A Japanese branch of a U.S. corporation paid $4,200,000 in taxes to the government of Japan on income it generated there. The corporation is subject to a 35% tax rate in the U.S.

How much tax will be owed to the U.S. government on the $10,000,000 of Japanese branch income?

A) $4,200,000

B) $3,500,000

C) $0

D) $7,000,000

Difficulty: 2 Medium

Topic: U.S. Tax Treatment of Foreign Operation Income

Learning Objective: 08-05 Show how foreign tax credits reduce the incidence of double taxation.

Bloom's: Analyze

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

37) Under U.S. tax law, what happens to excess foreign tax credit?

A) It reduces taxes on ordinary income in the current year.

B) It can be carried back one year to calculate a refund on additional taxes paid in U.S. on foreign source income.

C) It is lost unless the average foreign tax rate paid by the company in the future is greater than the U.S. tax rate.

D) None of the above

Difficulty: 2 Medium

Topic: U.S. Tax Treatment of Foreign Operation Income

Learning Objective: 08-05 Show how foreign tax credits reduce the incidence of double taxation.

Bloom's: Evaluate

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

38) The subsidiary of a U.S. corporation located in Country Y generated income of $1,000,000 on which it paid $400,000 (40%) in taxes to Country Y. The subsidiary paid a dividend to the U.S. parent of $54,000. How much tax is currently owed to the U.S. government if the federal tax rate is 35%?

A) $18,900

B) $350,000

C) $140,000

D) $0

Difficulty: 2 Medium

Topic: U.S. Tax Treatment of Foreign Operation Income

Learning Objective: 08-05 Show how foreign tax credits reduce the incidence of double taxation.

Bloom's: Analyze

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

39) The subsidiary of a U.S. corporation located in Country Y generated income of $1,000,000 on which it paid $200,000 in taxes to Country Y. The subsidiary paid a dividend to the U.S. parent of $150,000. How much tax is currently owed to the U.S. government if the federal tax rate is 35%?

A) $35,625

B) $0

C) $52,500

D) $32,500

Difficulty: 3 Hard

Topic: U.S. Tax Treatment of Foreign Operation Income

Learning Objective: 08-05 Show how foreign tax credits reduce the incidence of double taxation.

Bloom's: Evaluate

AACSB: Analytical Thinking

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40) If a company is unable to use all its foreign tax credit in a tax year, what happens to the excess?

A) It is carried forward until it is used up.

B) It is carried back 3 years and forward 5 years.

C) It is carried back 1 year and forward 10 years.

D) It is lost forever.

Difficulty: 1 Easy

Topic: Foreign Tax Credits

Learning Objective: 08-05 Show how foreign tax credits reduce the incidence of double taxation.

Bloom's: Analyze

AACSB: Reflective Thinking

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41) The categories of foreign source income defined by the Tax Reform Act of 1986 are referred to as:

A) FTC rates.

B) FTC credits.

C) FTC baskets.

D) FTC brackets.

Difficulty: 1 Easy

Topic: FTC Baskets

Learning Objective: 08-05 Show how foreign tax credits reduce the incidence of double taxation.

Bloom's: Remember

AACSB: Knowledge Application

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42) Under U.S. tax law, what is the relationship between foreign tax credits and the different categories of foreign source income?

A) FTC from one category can offset taxes owed on other categories.

B) Excess FTC from one category can be carried forward to offset future U.S. taxes payable on another category.

C) Excess FTC from one category can be carried back to offset U.S. taxes paid on another category in the prior year.

D) None of the above

Difficulty: 2 Medium

Topic: Foreign Tax Credits

Learning Objective: 08-05 Show how foreign tax credits reduce the incidence of double taxation.

Bloom's: Apply

AACSB: Knowledge Application

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43) Under the American Jobs Creation Act of 2004, how many FTC baskets are used to classify foreign source income?

A) 9

B) 2

C) 12

D) 11

Difficulty: 1 Easy

Topic: FTC Baskets

Learning Objective: 08-05 Show how foreign tax credits reduce the incidence of double taxation.

Bloom's: Apply

AACSB: Knowledge Application

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44) Which of the following is a benefit of tax treaties?

A) They can be used to define tax jurisdiction.

B) They may be used to reduce withholding taxes.

C) They facilitate the exchange of information between countries.

D) All of the above

Difficulty: 1 Easy

Topic: Tax Treaties

Learning Objective: 08-03 Describe some of the benefits provided by tax treaties.

Bloom's: Understand

AACSB: Knowledge Application

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45) The definition of a "permanent establishment" is a key article of the OECD's model tax treaty. Which of the following would NOT be considered a permanent establishment by the OECD?

A) Branch

B) Mine

C) Storage facility

D) Construction site

Difficulty: 1 Easy

Topic: Tax Treaties

Learning Objective: 08-03 Describe some of the benefits provided by tax treaties.

Bloom's: Apply

AACSB: Knowledge Application

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46) What is a primary difference between the OECD and UN model tax treaties?

A) The UN model assumes all countries are economic equals, whereas the OECD model does not.

B) The UN model grants more taxing rights to the host country than does the OECD model when income repatriation is out of developing countries.

C) The model treaty of the UN gives more taxing rights to well-developed countries than developing countries.

D) All of the above are differences between the OECD and UN models.

Difficulty: 2 Medium

Topic: Tax Treaties

Learning Objective: 08-03 Describe some of the benefits provided by tax treaties.

Bloom's: Evaluate

AACSB: Knowledge Application

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47) While the U.S. has tax treaties with more than 50 countries, it does not have a treaty with Brazil, which is a major recipient of U.S. foreign direct investment. What is the reason for a lack of a U.S. Brazil treaty regarding withholding taxes?

A) The subsidiaries in Brazil do not pay dividends.

B) The advantage of a treaty would primarily go to the U.S., so Brazil is not interested in a treaty.

C) The advantage of a treaty would primarily go to Brazil, so the U.S. is not interested in a treaty.

D) United States has a policy against making tax treaties with countries in South America.

Difficulty: 1 Easy

Topic: Tax Treaties

Learning Objective: 08-03 Describe some of the benefits provided by tax treaties.

Bloom's: Apply

AACSB: Knowledge Application

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48) What term is used to describe a foreign corporation in which U.S. shareholders hold more than 50% of the voting power or fair market value of the corporation's stock?

A) Branch

B) Holding company

C) Controlled foreign corporation

D) Tax-exempt foreign corporation

Difficulty: 1 Easy

Topic: Controlled Foreign Corporations

Learning Objective: 08-04 Demonstrate how rules related to controlled foreign corporations; subpart F income; and foreign tax credit baskets affect U.S. taxation of foreign source income.

Bloom's: Apply

AACSB: Knowledge Application

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49) How does the U.S. government tax controlled foreign corporations (CFC) differently from other subsidiaries?

A) All income of the CFC is taxed by the U.S. in the year it is earned rather than when dividends are received.

B) Some income of the CFC is taxed by the U.S. in the year it is earned rather than when dividends are received.

C) None of the income generated by the CFC is subject to U.S. tax.

D) Only interest income from CFC is taxed in the year received by the U.S. government.

Difficulty: 1 Easy

Topic: Controlled Foreign Corporations

Learning Objective: 08-04 Demonstrate how rules related to controlled foreign corporations; subpart F income; and foreign tax credit baskets affect U.S. taxation of foreign source income.

Bloom's: Apply

AACSB: Knowledge Application

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50) What is "Subpart F" income?

A) All foreign source income

B) Foreign income that is not taxable by foreign jurisdictions

C) Income that is easily moved to low-tax jurisdiction

D) Foreign source income that is exempt from U.S. taxation

Difficulty: 1 Easy

Topic: Subpart F Income

Learning Objective: 08-04 Demonstrate how rules related to controlled foreign corporations; subpart F income; and foreign tax credit baskets affect U.S. taxation of foreign source income.

Bloom's: Apply

AACSB: Knowledge Application

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51) Which of the following is the most important type of Subpart F income?

A) Income from countries engaged in international boycotts

B) Income from foreign base companies

C) Income from insurance of U.S. risks

D) Income from illegal payments

Difficulty: 1 Easy

Topic: Subpart F Income

Learning Objective: 08-04 Demonstrate how rules related to controlled foreign corporations; subpart F income; and foreign tax credit baskets affect U.S. taxation of foreign source income.

Bloom's: Apply

AACSB: Knowledge Application

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52) Controlled foreign corporations (CFC) will not be taxed on their foreign income currently if:

A) the foreign tax rate is less than 90% of the U.S. corporate income tax rate.

B) Subpart F income is less than 70% of the CFC's total income.

C) Subpart F income is less than 5% of the CFC's total income.

D) None of the above

Difficulty: 1 Easy

Topic: Determination of the Amount of CFC Income Currently Taxable

Learning Objective: 08-04 Demonstrate how rules related to controlled foreign corporations; subpart F income; and foreign tax credit baskets affect U.S. taxation of foreign source income.

Bloom's: Apply

AACSB: Knowledge Application

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53) What is the "Safe Harbor Rule?"

A) If a foreign tax rate is 90% or more of the U.S. corporate tax rate, no part of a controlled foreign corporation's income is considered Subpart F income.

B) This is a guideline issued by the OEDC that encourages developed countries to open branches in underdeveloped countries.

C) If a controlled foreign corporation's Subpart F income is less than 10% of its total income, it will not be taxed currently by the U.S. government.

D) If a controlled foreign corporation's Subpart F income is less than 10% of its total income, it will not be taxed until dividends are received by the parent.

Difficulty: 1 Easy

Topic: Safe Harbor Rule

Learning Objective: 08-04 Demonstrate how rules related to controlled foreign corporations; subpart F income; and foreign tax credit baskets affect U.S. taxation of foreign source income.

Bloom's: Apply

AACSB: Knowledge Application

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54) Under the U.S. model tax treaty, which of the following statements is correct?

A) Interest and royalties are exempt from withholding.

B) Dividends are subject to a maximum 20% withholding.

C) Interest and royalties are subject to a maximum 15% withholding.

D) No passive income is exempt from withholding.

Difficulty: 1 Easy

Topic: Model Tax Treaties

Learning Objective: 08-03 Describe some of the benefits provided by tax treaties.

Bloom's: Apply

AACSB: Knowledge Application

Accessibility: Keyboard Navigation

55) To calculate U.S. tax, what exchange rate must be used to translate foreign branch net income?

A) Current rate

B) Rate at the beginning of the year

C) Average rate for the year

D) Rate at the end of the year

Difficulty: 1 Easy

Topic: Translation of Foreign Currency Income

Learning Objective: 08-06 Explain and demonstrate procedures for translating foreign currency amounts for tax purposes.

Bloom's: Apply

AACSB: Knowledge Application

Accessibility: Keyboard Navigation

56) The exchange gain or loss on repatriated funds from a foreign branch is calculated by multiplying the nominal amount of the funds by:

A) the difference between the exchange rate at the beginning of the year and the exchange rate at the end of the year.

B) the difference between the exchange rate on the date of repatriation and the exchange rate used to translate the branch's pretax income.

C) the difference between the current exchange rate and the exchange rate at the end of the year.

D) the difference between the exchange rate on the date of repatriation and the exchange rate at the beginning of the year.

Difficulty: 2 Medium

Topic: Translation of Foreign Currency Income

Learning Objective: 08-06 Explain and demonstrate procedures for translating foreign currency amounts for tax purposes.

Bloom's: Apply

AACSB: Knowledge Application

Accessibility: Keyboard Navigation

57) Why might a developing country offer a tax holiday?

A) To encourage job creation

B) To encourage foreign investment in the country

C) To stimulate foreign trade

D) All of the above

Difficulty: 1 Easy

Topic: Types of Taxes and Tax Rates

Learning Objective: 08-01 Describe differences in corporate income tax and withholding tax regimes across countries.

Bloom's: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

58) What is a major limitation to the apparent incentive of tax holidays?

A) If an MNC is taxed on worldwide income, it will eventually pay tax on the foreign income when it is repatriated.

B) Income earned by multinational corporations must remain in the foreign country offering the tax holiday.

C) The tax holidays are only available to large multinational corporations of wealthier nations.

D) Tax holidays are offered only by governments with the ten weakest economies.

Difficulty: 2 Medium

Topic: Types of Taxes and Tax Rates

Learning Objective: 08-01 Describe differences in corporate income tax and withholding tax regimes across countries.

Bloom's: Analyze

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

59) Which of the following statements about China is correct?

A) It has not enacted any legislation to allow tax holidays.

B) It has a tax treaty with the United States.

C) It is isolationist and shuns foreign investment within its borders.

D) None of the above statements is correct.

Difficulty: 1 Easy

Topic: Tax Treaties

Learning Objective: 08-01 Describe differences in corporate income tax and withholding tax regimes across countries.

Bloom's: Analyze

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

60) ________ describes a process in which a resident of Country A uses a corporation in Country B to get the benefit of Country B's tax treaty with Country C.

A) Capital budgeting

B) Tax holiday

C) Treaty shopping

D) Bona fide residence test

Difficulty: 1 Easy

Topic: Treaty Shopping

Learning Objective: 08-01 Describe differences in corporate income tax and withholding tax regimes across countries.

Bloom's: Apply

AACSB: Knowledge Application

Accessibility: Keyboard Navigation

61) Zen Energies is a Chinese branch of Super Sigma Inc., incorporated in U.S. In the year ending Dec. 31, 2019, the net income of Zen was 25 million Yuan before tax of 25%. During the year the average exchange rate was 0.16379 Yuan per dollar. The exchange rate on the date of payment of taxes is was 0.16474 Yuan per dollar. Determine the amount of U.S. taxable income.

A) $3.0711 million

B) $114.475 million

C) $18.75 million

D) $4.1007 million

Difficulty: 3 Hard

Topic: Translation of Foreign Currency Income

Learning Objective: 08-06 Explain and demonstrate procedures for translating foreign currency amounts for tax purposes.

Bloom's: Analyze

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

62) To determine U.S. taxable income, foreign branch net income is grossed up by:

A) adding taxes paid to the foreign government translated at the exchange rate at the end of the year.

B) deducting taxes paid to the domestic government translated at the exchange rate at the date of payment.

C) adding taxes paid to the foreign government translated at the exchange rate at the date of payment.

D) deducting taxes paid to the foreign government translated at the exchange rate at the date of payment.

Difficulty: 1 Easy

Topic: Translation of Foreign Currency Income

Learning Objective: 08-06 Explain and demonstrate procedures for translating foreign currency amounts for tax purposes.

Bloom's: Analyze

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

63) The income of a foreign subsidiary is not taxable until dividends are distributed to the U.S. parent unless:

A) Subpart F income is present.

B) the income from subsidiary exceeds 10 million.

C) extraordinary gains and losses form a part of the income.

D) the subsidiary is situated in a China.

Difficulty: 2 Medium

Topic: Subpart F Income

Learning Objective: 08-06 Explain and demonstrate procedures for translating foreign currency amounts for tax purposes.

Bloom's: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation