2) 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.
3) 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
4) 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%
5) 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%
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
Instruction 15.1:
Use the information to answer the following question(s).
Green Valley Exporters USA has $100,000 of before tax foreign income. The host country has a
corporate income tax rate of 25% and the U.S. has a corporate income tax rate of 35%.
7) 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
8) 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
9) 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 Valley’s total U.S. corporate tax on the foreign
earnings would be:
A) $10,000.
B) $26,250.
C) $35,000.
D) $51,250.
10) 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 Valley’s total U.S. corporate tax on the foreign earnings
would be:
A) $51,250.
B) $35,000.
C) $26,250.
D) $10,000.
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
12) ________ is the pricing of goods, services, and technology between related companies.
A) Among pricing
B) Retail pricing
C) Transfer pricing
D) Wholesale pricing
13) Tax credits are less valuable on a dollar-for-dollar basis than are tax-deductible expenses.
14) 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.
15) When a firm is organized with decentralized profit centers, transfer pricing between centers
can help in the evaluation of each subsidiary performance.
16) 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.
17) What is a transfer price, and can a government regulate it? What difficulties and motives
does a parent multinational firm face in setting transfer prices?
Answer: A transfer price is the amount paid by one unit of a company (domestic or
international) for goods or services purchased from another unit of the same firm. As such, a
15.3 Tax Haven and International Offshore Financial Centers
1) 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
2) Tax haven subsidiaries of MNEs are categorically referred to as international offshore
financial centers.
3) Maximizing local profits in joint ventures overseas could be suboptimal from the overall view
of the MNE.
4) What are the desired characteristics for a country if it expects to be used as a tax haven?
Answer: Tax-haven subsidiaries are typically established in a country that can meet the
following requirements: 1) A low tax on foreign investment or sales income earned by resident
1) Finance ministers of the G20 in conjunction with the OECD created an action plan to stop
basis erosion and profit shifting (BEPS) in an effort to stop illegal activity.
2) Why is core to Google’s tax planning to fix a tax base (also known as permanent
establishment) in Ireland?
1) 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
2) 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
3) In a typical naked corporate inversion transaction the corporation’s effective global tax
liability is reduced but the effective control does not change.
4) The 80% rule added in the American Jobs Creation Act (AJCA) of 2004 makes less likely that
the former parent company would continue to be treated as domestic.
5) 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.
6) Why do the U.S. tax authorities tax passive income generated offshore differently from active
income?