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Multinational Business Finance, 13e (Eiteman/Stonehill/Moffett) Chapter 15
Multinational Tax Management 15.1 Tax Principles Multiple Choice
Question: 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 Answer:
Question: 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. Answer:
Question: 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 Answer:
Question: 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. Answer:
Question: 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
Answer:
Question: 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 Answer:
Question: 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 Answer:
Question: 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: A) 75%. B) 62.5%. C) 0%. D) 50%. Answer:
Question: The territorial approach to taxation policy is also termed the ________
approach. A) source B) ethical C) greedy D) location Answer:
Question: 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 Answer:
Question: What is the total value of taxes paid in the following example if the value added
tax is 10%? A farmer raises wheat that he sells for $1.50 to the grain company. The grain
company sells to the processor for $2.00 per bushel. The processor turns the wheat into a
breakfast cereal and wholesales it for $3.00 per bushel. The retailer sells the cereal for
$4.00 per bushel. A) $0.15 B) $0.20 C) $0.30 D) $0.40 Answer:
Question: Refer to Table 15.1. If BayArea pays out 50% of its earnings from each
subsidiary, what are the additional U.S. taxes due on the foreign sourced income from the
Ukraine and Korea respectively. A) Ukraine = $0; Korea = ($30,0
Question: B) Ukraine = $100,000; Korea = $0 C) Ukraine = $0; Korea = $66,250 D) none
of the above Answer:
Question: Refer to Table 15.1. The additional U.S. taxes due on the repatriation of income
from the Ukraine to the United States, alone, assuming a 50% payout rate, is: A) excess
foreign tax credits of $110,000. B) additional U.S. taxes due of $97,000. C) additional U.S.
taxes due of $36,500. D) excess foreign tax credits of $18,500. Answer:
Question: Refer to Table 15.1. How much in additional U.S. taxes would be due if
BayArea averaged the tax credits and liabilities of the two foreign units, assuming a 50%
payout rate from each? A) $3,750 B) $13,750 C) $2,500 D) $0 Answer:
Question: Refer to Table 15.1. If BayArea set the payout rate from the Ukraine subsidiary
at 25%, how should BayArea set the payout rate of the Korean subsidiary (approximately)
to more efficiently manage its total foreign tax bill? A) 28.5% B) 24.5% C) 42.6% D)
82.3% Answer:
Question: Refer to Table 15.1. What is the minimum effective tax rate that BayArea can
achieve on its foreign-sourced income? A) 26% B) 35% C) 40% D) 0% Answer:
Question: 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 Answer:
Question: 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 Answer:
Question: 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 Answer:
Question: Refer to Instruction 15.1. If the U.S. has no bilateral trade agreement with the
host country, what is the total amount of income taxes Green Valley Exporters will pay? A)
$25,000 B) $35,000 C) $51,250 D) $60,000 Answer:
Question: Refer to Instruction 15.1. If the U.S. has a bilateral trade agreement with the host
country that calls for the total tax paid to be equal to the maximum amount that could be
paid in the highest taxing country, what is the total amount of income taxes Green Valley
Exporters will pay to the host country, and how much will they pay in U.S income taxes on
the foreign earned income? A) $25,000; $10,000 B) $25,000; $26,250 C) $35,000; $0 D)
none of the above Answer:
Question: Refer to Instruction 15.1. If the U.S. treated the taxes paid on income earned in
the host country as a tax-deductible expense, then Green Valleys total U.S. corporate tax
on the foreign earnings would be: A) $10,000. B) $26,250. C) $35,000. D) $51,250.
Answer:
Question: Refer to Instruction 15.1. If the U.S. treated the taxes paid on income earned in
the host country as a tax-credit, then Green Valleys total U.S. corporate tax on the foreign
earnings would be: A) $51,250. B) $35,000. C) $26,250. D) $10,000. Answer:
Question: 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 Answer:
Question: 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 Answer:
Question: ________ is the pricing of goods, services, and technology between related
companies. A) Among pricing B) Retail pricing C) Transfer pricing D) Wholesale pricing
Answer:
Question: The primary objective of multinational tax planning is to minimize the firms
worldwide tax burden. Answer:
Question: A country CANNOT have both a territorial and a worldwide approach as a
national tax policy. Answer:
Question: Tax treaties generally have the effect of increasing the withholding taxes
between the countries that are negotiating the treaties. Answer:
Question: A value-added tax has gained widespread usage in Western Europe, Canada, and
parts of Latin America. Answer:
Question: All indications are that the value-added tax will soon be the dominant form of
taxation in the U.S. Answer:
Question: 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. Answer:
Question: 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. Answer:
Question: The ideal tax should not only raise revenue efficiently but also have as few
negative effects on economic behavior as possible. Answer:
Question: 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). Answer:
Question: 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). Answer:
Question: Of the OECD 30 countries, most employ a worldwide approach to tax policy,
but a few, including the United States, use the worldwide approach. Answer:
Question: FEW governments rely on income taxes, both personal and corporate, for their
primary revenue source. Answer:
Question: Between 2006 - 2012, global corporate tax rates have trended upward. Answer:
Question: Tax credits are LESS valuable on a dollar-for-dollar basis than are deductible
expenses. Answer:
Question: Tax treaties typically result in reduced withholding tax rates between the two
signatory countries. Answer:
Question: Tax credits are less valuable on a dollar-for-dollar basis than are tax-deductible
expenses. Answer:
Question: 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. Answer:
Question: Tax haven subsidiaries of MNEs are categorically referred to as international
offshore financial centers. Answer:
Question: 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:
Question: 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:
