Chapter 10 International Taxation: Multiple Choice Questions

Chapter 10 International Taxation
Multiple Choice Questions

1. What is the optimal tax objective for multinational corporations?
A) minimize domestic taxes paid on world-wide income
B) minimize world-wide taxes paid, within the limitations of applicable tax law
C) minimize world-wide taxes paid
D) minimize foreign taxes
Answer: B Level: Easy LO: 1
2. There are two primary 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
Answer: C Level: Medium LO: 1
3. 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.
Answer: D Level: Easy LO: 2
4. 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.
Answer: A Level: Easy LO: 2
Doupnik, International Accounting 2e

5. 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.
6. 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
Answer: B Level: Medium LO: 1
7. 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
Answer: C Level: Easy LO: 1
8. 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
Answer: A Level: Medium LO: 1
9. In addition to having very low effective tax rates, which of the following is also a
characteristic of tax havens?
A) lack of transparency in financial reporting
B) lack of effective exchange of information
C) absence of substantial activities requirement
D) All of the above

10. The Organization for Economic Cooperation and Development (OECD) has
established guidelines to eliminate tax havens. Why, then, can the OECD (as of 2004)
still identify over 30 countries as tax havens?
A) The definition of tax haven continuously changes.
B) The concept of tax haven is supported by the United Nations.
C) The OECD has no enforcement powers.
D) The OECD lacks the willingness to enforce the guidelines.
11. 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
12. 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 a 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.
13. 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

14. 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) tax on the difference between the cost of a product and its selling price
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.
15. 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?
A) FC 200,000
B) FC 500,000
C) FC 300,000
D) FC 800,000
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 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
Answer: D Level: Medium LO: 2
17. 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) world-wide approach
C) legalistic approach

18. Dividends received from companies in countries other than one's home country are
classified as:
A) non-taxable income
B) exempt income
C) foreign source income
D) taxable income
19. What approach is taken by the United States of America relative to taxing income?
A) citizenship
B) residence
C) both citizenship and residence
D) none of the above
20. 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.
21. 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.

22. Under U.S. tax law, what is a resident?
A) a person living in the United States for 183 days or more per 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
23. 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
Answer: A Level: Easy LO: 2
24. 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.
25. 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.
26. 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

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
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
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.
Answer: B Level: Hard LO: 3
30. Under U.S. tax laws, how are taxes paid by U.S. corporations to foreign governments
treated?
A) Total foreign taxes paid are deductions in calculating taxable income.
B) Foreign income taxes paid are credits against U.S. taxes owed.
C) Taxpayers may choose between (A) and (B) stated above.

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
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
33. 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.
34. 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

35. 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
Use the following to answer questions 36-37:
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.
36. 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
37. How much tax will be owed to the U.S. government on the Japanese branch income?
A) $4,200,000
B) $3,500,000
C) $0
D) $7,000,000
38. 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 to the
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.

39. The nine 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
40. 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.
41. 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
42. 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
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43. 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) $28,125
C) $52,500
D) $32,500
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
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
46. What is a primary difference between the OECD and UN model tax treaties?
A) The model espoused by the UN assumes all countries are equals, whereas the
OECD model does not.
B) The model treaty advocated by the UN 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.
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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.
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
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.
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 tax havens
D) foreign source income that is exempt from U.S. taxation
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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
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.
Answer: C Level: Hard LO: 5
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.
54. 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
13

55. 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.
56. 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
57. What is a major limitation to the apparent incentive of tax holidays?
A) If a 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.
D) Tax holidays are offered only by governments with the ten weakest economies.
58. What is another name for the worldwide approach of tax jurisdiction?
A) nationality approach
B) global approach
C) international approach
D) boundary approach
14

59. 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
60. 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.
61. What is the main advantage of the American Jobs Creation Act of 2004 over the Tax
Reform Act of 1986 relative to FTC baskets.
A) A newer tax act is always more advantageous.
B) It has much fewer baskets and, as a result, more chance that a company wont
have excess unused FTCs.
C) There is no advantage, as excess FTCs from one basket still cant be used to
offset tax in another basket.
D) The carryforward period for excess FTCs was extended.
62. 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.
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63. Which of the following statements about China is correct?
A) It has not enacted any legislation to allow tax holidays.
B) In 2002 it surpassed the U.S. as the largest recipient of foreign direct investment.
C) It is isolationist and shuns foreign investment within its borders.
D) None of the above statements is correct.
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How do differences in effective corporate tax rates between countries affect capital investment decisions?

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

What is a tax holiday?

What is a tax holiday?

Chapter 10 International Taxation

Multiple Choice Questions

Doupnik, International Accounting 2e