Chapter 15

16) Of the following, which is NOT cited by the authors as an example of tax haven? A) Ireland B) Bermuda C) Cayman Islands D) Bahamas

A) Ireland

15) The rapid evolution of corporate inversions for U.S.-based multinationals over the past 20 years has been attributed to all of the following EXCEPT: A) lack of foreign tax credits B) relatively high U.S. corporate tax rate C) U.S. lack of global competitiveness D) the worldwide tax principles

A) lack of foreign tax credits

9) The territorial approach to taxation policy is also termed the ________ approach. A) source B) ethical C) greedy D) location

A) source

6) 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/an ________ approach to levying taxes. A) worldwide B) territorial C) neutral D) equitable

A) worldwide

29) 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?

Answer: A value-added tax (VAT) is a form of national sales tax, where goods are taxed at each step of extraction, production, wholesale, and retail. A VAT tax is considered regressive because those with lower incomes pay the same taxes on a particular commodity as those with more money. Americans have never taken to this type of national tax because the most similar type of state and local tax is the sales tax, and that has always been the domain of the states. Plus the fact that it is regressive make the tax a tough sell to tax payers.

28) 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.

Answer: The worldwide approach taxes the income of firms based on their place of residence rather than on where the income was earned. Thus, a U.S. based MNE will owe U.S. taxes on income earned in, say, Britain. The territorial approach to taxation taxes all of the income earned within the borders of the country by both domestic and foreign-based firms. Thus, a British-based firm making sales in New York will owe taxes in the U.S. Through a series of bilateral tax agreements the U.S. and several trading partners have tried to workout tax issues. Generally, the taxes a U.S. based MNE pays abroad will help offset any required taxes the firm might have on funds remitted to the United States.

5) Toyota Motor Company operates in many different countries and pays taxes at many different rates. However, they always pay the same rate as their local competitors. Toyota Motor Company is operating in an environment of ________ tax policy. A) domestic neutrality B) foreign neutrality C) territorial approach D) none of the above

B) foreign neutrality

1) 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

B) full disclosure to the tax authorities.

12) 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

B) transfer

8) Bacon Signs 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, Bacon should pay taxes at a rate of ________ in the country of incorporation. A) 75%. B) 62.5%. C) 0%. D) 50%.

C) 0%.

12) ________ is the pricing of goods, services, and technology between related companies. A) Among pricing B) Retail pricing C) Transfer pricing D) Wholesale pricing

C) Transfer pricing

3) 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

C) neutral; tax incentive

6) 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

C) tax credit; tax deduction

7) 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

C) territorial

10) 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

C) value-added tax

13) 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

D) reduced withholding tax rates

2) 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.

D All of the above are objectives.

4) 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.

D) All are examples of a tax incentive policy.

11) 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

D) all of the above

13) Tax-haven subsidiaries are typically established in a country that can meet the following requirements: 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) the facilities to support financial services, for example, good communications, professional qualified office workers, and reputable banking services. C) a stable government that encourages the establishment of foreign-owned financial and service facilities within its borders. D) all of the above

D) all of the above

14) Tax-haven subsidiaries are typically established in a country that can meet the following requirements: 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) the facilities to support financial services, for example, good communications, professional qualified office workers, and reputable banking services. C) a stable government that encourages the establishment of foreign-owned financial and service facilities within its borders. D) all of the above

D) all of the above

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

FALSE

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

FALSE

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

FALSE

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

FALSE

19) 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.

FALSE

19) When a firm is organized with decentralized profit centers, transfer pricing between centers can help in the evaluation of each subsidiary performance.

FALSE

20) If a U.S. multinational remits profits from two different countries (subsidiaries) back to the parent company (U.S.), the excess foreign tax credit from one subsidiary can only be cross-credited against another subsidiary from the same country.

FALSE

20) 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.

FALSE

23) One case of inversion is when a U.S. company is merged with a large foreign firm and the new combined entity is incorporated in the foreign country. The added stipulation to be a valid inversion is that the previous U.S. ownership must have a position of less than 80% ownership in the new combined entity.

FALSE

23) The territorial approach, also referred to as the source approach to tax policy, levies taxes on the income earned by firms that are incorporated in the host country, regardless of where the income was earned (domestically or abroad).

FALSE

25) FEW governments rely on income taxes, both personal and corporate, for their primary revenue source.

FALSE

26) Between 2006 - 2012, global corporate tax rates have trended upward.

FALSE

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

TRUE

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

TRUE

18) 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 proved innocent" tax approach.

TRUE

21) The ideal tax should not only raise revenue efficiently but also have as few negative effects on economic behavior as possible.

TRUE

22) The worldwide approach, also referred to as the residential or national approach to tax policy, levies taxes on the income earned by firms that are incorporated in the host country, regardless of where the income was earned (domestically or abroad).

TRUE

24) Of the OECD 30 countries, most employ a worldwide approach to tax policy, but a few, including the United States, use the worldwide approach.

TRUE

27) Tax treaties typically result in reduced withholding tax rates between the two signatory countries.

TRUE