International accounting Chapter 8
Select the best answer to complete the following statement: "Beginning 2018, a U.S parent company is entitled to a ______ dividends received deduction for dividends it receives from any 10-percent-or-greater-owned foreign operation."
100 percent
The withholding tax rate for interest income recommended by the OECD model is:
10 percent
The withholding tax rate for portfolio dividends (paid to individuals) recommended by the OECD model is:
15 percent
Under the TCJA, at which tax rate were the deemed repatriated earnings held in cash or cash equivalents taxed?
15.5%
Excess foreign tax credits (FTC) may be used to offset additional taxes paid to the U.S on foreign source income in years in which foreign tax rates are lower than the U.S tax rate. How many years can an excess FTC may be carried forward?
10 year
The overall Foreign Tax Credit (FTC) limitation is calculated as follows:
Foreign source taxable income / Worldwide taxable income x U.S taxes before FTC
Double taxation arises when:
Two countries levy tax on the same income
Select the best answer to complete the following statement: "The BEAT - Based Erosion Anti-abuse Tax - is a new tax that is intended to apply to companies that significantly reduce their ______ by making payments to foreign affiliates (foreign parent, foreign subsidiary, or foreign branch)."
U.S tax liability
One of the two approaches taken on the issue of foreign source income is:
Worldwide approach
In Malaysia, corporations that undertake a project involving the manufacture of specialized machinery and equipment receive:
a 100 percent tax exemption for up to 10 years
The American Jobs Creation Act of 2004 required foreign source taxable income to be classified into two categories, also referred as "baskets". What are the two baskets?
a general income basket and a passive income basket
Which of the following factors determine the amount of income taxes paid to a government? a. the corporate income tax rate b. how taxable income is calculated c. which expenses are deductible
a, b, c
Regardless of the approach used in determining the scope of taxation, a second issue related to jurisdiction is:
the basis of taxation
What is a functional currency?
the currency in which the foreign operation primarily conducts business
The appropriate translation procedures for determining U.S taxable income depend on:
the functional currency of the foreign operation
What does "global intangible low-taxed income" refer to?
the income earned by controlled foreign corporations (CFC) exceeding a specified return on all CFCs' tangible assets
The U.S parent manufactures a product that it sells to its controlled foreign corporation (CFC) in Hong Kong, which in turn sells the product to customers in Japan. Which sales would generate Subpart F income?
the sales to customers outside of Hong Kong
Multinational corporations make a number of very important decisions in which taxation is an important variable. Taxes issues are important in deciding all of the following, except:
which local culture to follow
Assume that Davis company (a U.S taxpayer) has a subsidiary located in Uzbekistan. The income tax rate in the U.S is 21%, in Uzbekistan is 7.5%, and the withholding tax rate in Uzbekistan is 10%. What is the effective tax rate of Uzbekistan? Is Uzbekistan a tax haven?
16.75%. Yes, it is a tax haven
The factors used to determine the appropriate amount of U.S taxable income from foreign operations are all of the following, except:
Current U.S corporate tax rate
Assume CNU Company's foreign branch earns income before income taxes of $200,000. Income taxes paid to the foreign government are computed based on a rate of 10%. Sales and other taxes paid to the foreign government are $10,000. CNU is a U.S company. The US income tax before credit is 21%. What is the U.S taxable income if CNU takes the tax deduction?
$170,000
Assume CNU Company's foreign branch earns income before income taxes of $200,000. Income taxes paid to the foreign government are computed based on a rate of 10%. Sales and other taxes paid to the foreign government are $10,000. CNU is a U.S company. The US income tax before credit is 21%. What is net U.S tax liability if CNU takes the tax deduction?
$35,700
The withholding tax rate on dividends in the U.S is 30%. Frucot, an U.S-based company, pays $200 dividend to a stockholder in Vietnam. What is the amount of tax withheld from the dividend payment?
$60
The withholding tax rate for royalties recommended by the OECD model is:
0 percent
The Tax Cuts and Jobs Act 2017 created an additional Foreign Tax Credit (FTC) basket for foreign branch income. What is/are the result(s) of this change? 1. Controlled Foreign Corporations (CFC) Subpart F income must be allocated to either a general income basket or a passive income basket 2. Foreign branch income must be allocated to a foreign branch income basket. 3. Companies are allowed to net FTCs across baskets.
1 and 2
Excess foreign tax credits (FTC) may be used to offset additional taxes paid to the U.S on foreign source income in years in which foreign tax rates are lower than the U.S tax rate. How many years can an excess FTC may be carried back?
1 year
Regarding to the basis of taxation, to determine jurisdictional authority countries usually use: 1. source of income 2. citizenship 3. residence
1, 2 or 3 or their combination
What is the range of the value-added tax in the European Union?
17% to 27%
Under the safe harbor rule, if the foreign tax rate is greater than 90 percent of the U.S corporate income tax rate, then none of the CFC's income is considered to be Subpart F income. With the current U.S tax rate of 21 percent, U.S MNCs need not be concerned with the CFC rules for those foreign operations located in countries with an effective tax rate of:
18.9 percent or higher
As part of the "Tax Cuts and Jobs Act" in the U.S, effective for tax years beginning 2018, what is the corporate income tax rate in the U.S?
21 percent
To calculate foreign tax credit, which taxes must be determined? 1. Foreign income taxes 2. Foreign withholding taxes 3. Both foreign income taxes and foreign withholding taxes are needed to calculate foreign taxes
3
Assume that HKD company (a U.S taxpayer) has a subsidiary located in Zimbabwe. Income tax rate in the U.S is 21%, in Zimbabwe is 25%, withholding tax rate in Zimbabwe is 10%. What is the effective tax rate of Zimbabwe? Is Zimbabwe a tax haven?
32.5%. No, it is not a tax haven
In Sri Lanka, tax holidays ranging in length from ______ are provided, depending on the activity and size of investment.
4 to 12 years
Select the best answer to complete the following statement: "A controlled foreign corporation (CFC) is any foreign corporation in which U.S shareholders hold more than ______ percent of the combined voting power or fair market value of the stock."
50
Select the best answer to complete the following statement: "A controlled foreign corporation (CFC) is any foreign corporation in which U.S shareholders hold more than ______ percent of the combined voting power or fair market value of the stock. Only those U.S taxpayers directly or indirectly owning ______ percent more more of the stock are considered U.S shareholders in determining whether the threshold is met."
50, 10
How many years does the TCJA allow U.S corporations to pay their tax installments?
8
Under the TCJA, at which tax rate were the deemed repatriated earnings that had been invested in noncash assets taxed?
8%
Select the best answer to complete the following statement: "Under the safe harbor rule, if the foreign tax rate is greater than ______ percent of the U.S corporate income tax rate, then none of the CFC's income is considered to be Subpart F income."
90
The Tax Cuts and Jobs Act, passed in 2017, made the most extensive changes to the international tax provisions in U.S tax law since 1986. Besides the adoption of a participation exemption system of taxation in which most foreign subsidiary income is exempt from U.S taxation. Other major international tax provisions of the new law are all of the followings, except:
A full adoption of OECD model
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. $3,500,000 B. $4,200,000 C. $0 D. $7,000,000
A. $3,500,000
Bush, Inc., has total worldwide income of $500,000. Bush's Polish branch has foreign source income of $200,000 and paid taxes of $38,000 to the Polish government. The U.S. corporate tax rate is 21 percent. What is Bush's overall foreign tax credit limitation? A. $70,000 B. $38,000 C. $105,000 D. $42,000
A. $70,000 $200,000/$500,000 x ($500,000 x 35%) = $70,000 Overall FTC limitation = (Foreign Source Taxable Income/Worldwide Taxable income) x U.S. Taxes before FTC Wrong
Information for Year 1, Year 2, and Year 3 for the Alpinian branch of Rawl Corporation is presented in the following table. The corporate tax rate in the Alpinian Republic in Year 1 was 11 percent. In Year 2, the Alpinian Republic increased its corporate income tax rate to 15 percent. In Year 3, the Alpinian Republic increased its corporate tax rate to 22 percent. The U.S. corporate tax rate in each year is 21 percent. Year 1 Year 2 Year 3 Foreign source income $75,000 $100,000 $100,000 Foreign taxes paid 8,250 15,000 22,000 U.S. tax before FTC 15,750 21,000 21,000 For Year 1, Year 2, and Year 3, what is the foreign tax credit allowed in the United States? A. $8,250, $15,000, and $21,000. B. $15,750, $21,000, and $22,000. C. $15,750, $15,000, and $21,000. D. $8,250, $15,000, and $22,000.
A. $8,250, $15,000, and $21,000.
In deciding whether to establish a foreign operation, which factor(s) might a multinational corporation (MNC) consider? A. All answers are correct. B. The tax treatments of branches versus subsidiaries. C. Withholding rates on dividend and interest payments. D. After-tax returns from competing investment locations.
A. All answers are correct.
Why might a developing country offer a tax holiday? A. All of the above B. To encourage foreign investment in the country C. To encourage job creation D. To stimulate foreign trade
A. All of the above
To calculate U.S. tax, what exchange rate must be used to translate foreign branch net income? A. Average rate for the year B. Rate at the beginning of the year C. Current rate D. Rate at the end of the year
A. Average rate for the year
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. All of the above D. Cash flows from dividends must be discounted using the cost of capital, which is not the case for interest.
A. Interest is generally a deductible expense, whereas dividends paid are not.
In general, why do countries wish to avoid double taxation on corporations? A. It discourages foreign direct investment. B. The calculations of the taxes are excessively complex. C. It contributes to accounting diversity. D. Enforcement of the tax law becomes excessively burdensome.
A. It discourages foreign direct investment.
An indirect foreign tax credit arises when: A. taxes paid by a foreign subsidiary are taken as a credit against a parent's taxes when dividends are received from the subsidiary. B. a foreign taxing jurisdiction does not tax a subsidiary within its jurisdiction and allows the parent country to tax the foreign source income. C. taxing jurisdictions agree to share the taxes paid by a foreign subsidiary. D. taxes paid by a parent on foreign branch income is deducted from taxes owed to the parent's home country.
A. taxes paid by a foreign subsidiary are taken as a credit against a parent's taxes when dividends are received from the subsidiary.
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. $4.1007 million C. $114.475 million D. $18.75 million
B. $4.1007 million
Poole Corporation is a U.S. company with a branch in China. Income earned by the Chinese branch is taxed in both China, at the corporate income tax rate of 25 percent, and the United States, at the rate of 21 percent. What is this an example of? A. Taxation on the basis of consumption. B. Double taxation. C. Capital-export neutrality. D. A tax treaty.
B. Double taxation.
What is the optimal tax objective for multinational corporations? A. Minimize foreign taxes B. Minimize worldwide taxes paid, within the limitations of applicable tax law C. Minimize the credit for worldwide taxes paid D. Minimize domestic taxes paid on worldwide income
B. Minimize worldwide taxes paid, within the limitations of applicable tax law
How is a foreign subsidiary different from a foreign branch of a domestic corporation? A. A subsidiary is created to manufacture and distribute products in foreign markets, whereas a branch's only function is sales in the foreign market. B. The subsidiary is a company incorporated in the foreign country, whereas a branch is not a separate corporation. C. 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. D. 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.
_____ 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. Tax holiday B. Treaty shopping C. Capital budgeting D. Bona fide residence test
B. Treaty shopping
In the context of international taxation, the Bahamas, Lichtenstein, and Monaco are considered by the OEDC as: A. tax shelters. B. tax havens. C. tax holidays. D. tax centers.
B. tax havens.
Which countries are considered tax havens?
Bahamas and Ireland
A Vietnamese investor receives dividend payment from an investment in Amazon common stock. The problem of double taxation arises when:
Both Vietnam and the US tax this dividend payment
How is the amount of taxes paid to a government determined?
By the corporate tax rate and the manner in which taxable income is calculated
In which countries would tax-planning strategy tend to be more applicable?
Countries with different withholding rates on different types of payments
Under the American Jobs Creation Act of 2004, how many FTC baskets are used to classify foreign source income? A. 9 B. 12 C. 2 D. 11
C. 2 2 baskets 1. A general income basket and 2. Passive income basket. This change reduces the likelihood that a company will have excess FTCs that go unused.
Which of the following items might provide an MNC with a tax-planning opportunity as it decides where to locate a foreign operation? A. Whether a country offers a tax holiday. B. Differences in corporate tax rates across countries. C. All answers are correct. D. Differences in local tax rates across countries.
C. All answers are correct.
How does the U.S. government tax controlled foreign corporations (CFC) differently from other subsidiaries? A. None of the income generated by the CFC is subject to U.S. tax. B. Only interest income from CFC is taxed in the year received by the U.S. government. C. Some income of the CFC is taxed by the U.S. in the year it is earned rather than when dividends are received. D. All income of the CFC is taxed by the U.S. in the year it is earned rather than when dividends are received.
C. Some income of the CFC is taxed by the U.S. in the year it is earned rather than when dividends are received.
Kerry is a U.S. citizen residing in Portugal. Kerry receives some investment income from Spain. Why might Kerry be expected to pay taxes on the investment income to the United States? A. Portugal requires all of its residents to pay taxes to the United States. B. Spain requires all European Union investment income to be taxed. C. The United States taxes its citizens on their worldwide income. D. The United States taxes its citizens on the basis of residency.
C. The United States taxes its citizens on their worldwide income.
Assume a citizen of Canada resides permanently in the U.S and earns dividends income from an investment in the shares of a Mexican company. Taxing on the basis of citizenship, in which country will this individual be subject to taxation?
Canada
On which of the following bases does the U.S levy tax on an income earned by a U.S individual in a foreign country?
Citizenship
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.
D) All of the above
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. $0 C. $700,000 D. $100,000
D. $100,000
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 800,000 D. FC 300,000
D. FC 300,000
Under U.S. tax law, what happens to excess foreign tax credit? A. None of the above B. It is lost unless the average foreign tax rate paid by the company in the future is greater than the U.S. tax rate. C. It reduces taxes on ordinary income in the current year. D. It can be carried back one year to calculate a refund on additional taxes paid in U.S. on foreign source income.
D. It can be carried back one year to calculate a refund on additional taxes paid in U.S. on foreign source income.
What is the international norm for determining tax jurisdiction? A. Citizenship takes precedence over residence B. Domestic takes precedence over foreign C. Source takes precedence over residence D. Residence takes precedence over source
D. Residence takes precedence over source Wrong
Controlled foreign corporations (CFC) will not be taxed on their foreign income currently if: A. None of the above B. Subpart F income is less than 70% of the CFC's total income. C. the foreign tax rate is less than 90% of the U.S. corporate income tax rate. D. Subpart F income is less than 5% of the CFC's total income.
D. Subpart F income is less than 5% of the CFC's total income.
What is the U.S. policy concerning taxing income of a U.S. corporation's foreign subsidiary? A. The government of the U.S. does not tax foreign source income. B. 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. C. Tax is imposed on the foreign subsidiary income in the year it is earned. D. Tax is paid on the foreign subsidiary's income when the profits are returned to the U.S. parent as dividends.
D. Tax is paid on the foreign subsidiary's income when the profits are returned to the U.S. parent as dividends.
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. Worldwide approach B. Legalistic approach C. Nationality approach D. Territorial approach
D. Territorial approach
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. None of the above C. The home countries of both the parent and the subsidiary would forego taxation on the income earned by the subsidiary. D. The parent company's home country would allow tax credits for taxes paid to the subsidiary's home country.
D. The parent company's home country would allow tax credits for taxes paid to the subsidiary's home country.
In determining the net U.S tax liability on taxable foreign income, U.S companies are allowed to: 1. deduct all foreign taxes paid on the related foreign income 2. take a credit for foreign income taxes
Either 1 or 2
What has been the international trend related to corporate income tax rates?
In most countries, the trend has been a continuing reduction in corporate tax rates
Select the best answer to complete the following statement: "Countries generally use ______ as a basis to determine jurisdictional authority."
source of income
Select the best answer to complete the following statement: "______ are bilateral agreements between two countries regarding how companies and individuals from one country will be taxed when earning income in the other country."
Tax treaties
One of the two approaches taken on foreign source income issue is:
Territory approach
Assume a citizen of Italy resides permanently in France and earns dividends from an investment in the shares of a company in the U.S. Taxing on the basis of source of income, in which country will this individual be subject to taxation?
The U.S
Assume a citizen of Singapore resides permanently in the US and earns dividends from an investment in the shares of a company in UK. Taxing on the basis of residence, which country will this individual be subject to taxation?
The US
VinGroup is a controlled foreign corporation located in a foreign country with an effective tax rate greater than 90% of U.S rate, what will be the amount of foreign income taxable in the U.S?
The foreign income is not taxable in the U.S
Why would a country have tax holidays?
To compete for foreign investment
Select the best answer to complete the following statement: "______ 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."
Treaty shopping
What type of tax is usually levied on the value added at each stage in the production or distribution of a product or service?
Value-added tax
Tax planning by multinational entities to artificially shift profits to no- or low-tax jurisdictions (tax havens) where there is little or no real economic activity is referred to as:
base erosion and profit shifting
Select the best answer to complete the following statement: "The United Nations Model treaty, designed to be used ______, assumes ______."
between developed and developing countries, an imbalance
An important goal of most national tax systems is neutrality. In an international context, one of the standards for neutrality is:
capital-export neutrality
A major type of taxes imposed on profits earned by companies engaged in international business is:
corporate income tax
Under the United Nations Model, which host countries should have more taxing rights when profit repatriation essentially is a one-way street?
developing countries
Select the best answer to complete the following statement: To relieve the double taxation, the international norm is that ______ should take precedence over ______ in determining tax jurisdiction.
source, residence
Select the best answer to complete the following statement: "The U.S model treaty exempt ______ from withholding tax and establish ______ as the maximum withholding rate on dividends."
interest and royalties, 15 percent
Select the best answer to complete the following statement: A tax system would be considered "capital-export neutral" if a taxpayer's decision whether to invest at home or overseas ______ by taxation.
is not affected
Select the best answer to complete the following statement: "In the U.S, the Foreign Tax Credit (FTC) allowed is equal to the ______ of (1) the actual taxes paid to the foreign government, or (2) the amount of taxes that would have been paid if the income had been earned in the U.S"
lower
Select the best answer to complete the following statement: "Several countries have a ______ rate of withholding tax on interest than on dividends. Interest payments are generally ______, whereas dividend payments ______. Thus, there is an incentive for companies to finance their foreign operations with as much debt and as little equity for possible."
lower, tax deductible, are not
The amount of taxes that would have been paid if the income had been earned in the U.S can be computed by:
multiplying the amount of foreign source taxable income by the effective U.S corporate income tax rate
Select the best answer to complete the following statement: "An important goal of most national tax systems is ______. The tax system should remain in the background, and business, investment and consumption decisions should be made for non-tax reasons."
neutrality
Select the best answer to complete the following statement: "Beginning 2018, dividends received from foreign subsidiaries are ______ U.S corporate income taxation."
no longer subject to
Withholding taxes are imposed on payments made to foreign parent companies or foreign affiliated companies. The types of payments typically subject to withholding tax are all of the following, except:
purchase on credit
Select the best answer to complete the following statement: "Under the ______ approach, residents of a country are taxed by the country in which they reside regardless of their citizenship or where the income was earned."
residence
Select the best answer to complete the following statement: "Almost all countries generally assert the jurisdictional authority to tax income where it is earned, also known as ______ regardless of the residence or citizenship of the recipient."
source of income
