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49) Fundamentally, there are two types of tax jurisdiction.
A) The worldwide and the territorial
B) The residential and the visiting
C) The passive and the active income
D) The earned and the unearned
50) The worldwide method of declaring a national tax jurisdiction
A) is to tax national residents of the country on their worldwide income no matter in which country
it is earned.
B) is to tax all income earned within the country by any taxpayer, domestic or foreign.
C) is to tax national residents of the country on their domestic income but not foreign-earned
income.
D) none of the options
51) The worldwide method of declaring a national tax jurisdiction
A) is also known as the residential method.
B) is to tax national residents of the country on their worldwide income no matter in which country
it is earned.
C) is different from the territorial method of declaring a national tax jurisdiction.
D) all of the options
52) The territorial method of declaring a national tax jurisdiction is to
A) tax all income earned within the country by any taxpayer, domestic or foreign.
B) tax national residents of the country on their worldwide income no matter in which country it is
earned.
C) also known as the residential method.
D) none of the options
53) Affiliates of foreign MNCs are taxed on the income earned in the source country under
A) the territorial method of declaring a national tax jurisdiction.
B) the source method of declaring a tax jurisdiction.
C) all of the options
D) none of the options
54) Under the territorial method of declaring a national tax jurisdiction
A) the possibility of double taxation exists if the parent county of a foreign affiliate also levies a
tax on worldwide income.
B) tax is levied on all income earned within the country by any taxpayer, domestic or foreign.
C) tax is levied on foreign residents of the country on their home-country income but not
foreign-earned income.
D) none of the options
55) The typical approach to avoiding double taxation is
A) for a nation to grant the parent firm credit against its domestic tax liability for taxes paid to
foreign tax authorities on foreign-source income.
B) for a nation not to tax foreign-source income of its national residents.
C) for a company to use both worldwide and the territorial methods.
D) none of the options
56) The foreign tax credit method followed by the United States is
A) to grant the parent firm credit against its U.S. tax liability for taxes paid to foreign tax
authorities on foreign-source income.
B) in place for the purpose of avoiding double taxation.
C) to grant the parent firm credit against its U.S. tax liability for taxes paid to foreign tax
authorities on foreign-source income, and is in place for the purpose of avoiding double taxation.
D) none of the options
57) A direct foreign tax credit is
A) computed for direct taxes paid on active foreign-source income of a foreign branch of a U.S.
MNC.
B) computed on the indirect withholding taxes withheld form passive income distributed by the
foreign subsidiary to the U.S. parent.
C) computed for income taxes deemed paid by the subsidiary.
D) computed for direct taxes paid on active foreign-source income of a foreign branch of a U.S.
MNC, and is also computed on the indirect withholding taxes withheld form passive income
distributed by the foreign subsidiary to the U.S. parent.
58) In a given year, the U.S. IRS places an overall limitation applied to foreign tax credits.
A) The overall limitation is limited to the amount of tax due on the foreign-source income.
B) The overall limitation is limited to the amount of tax actually paid during the tax year on the
foreign-source income.
C) The overall limitation is limited to the amount of tax that would have been due on the
foreign-source income if it had been earned in the United States.
D) none of the options
59) In a given year, the U.S. IRS places an overall limitation applied to foreign tax credits.
A) the maximum tax credit is figured on world-wide foreign-source income; losses in one country
can offset profits in another.
B) the maximum tax credit is figured on foreign-source income in each country; losses in one
country cannot offset profits in another.
C) the overall limitation is limited to the amount of tax that would be due on the foreign-source
income if it had been earned in the United States.
D) the maximum tax credit is figured on world-wide foreign-source income; losses in one country
can offset profits in another, and the overall limitation is limited to the amount of tax that would be
due on the foreign-source income if it had been earned in the United States.
60) In a given year, the U.S. IRS places an overall limitation applied to foreign tax credits.
A) The maximum tax credit is figured on world-wide foreign-source income; losses in one country
can offset profits in another.
B) Value-added taxes paid cannot be included in determining the amount of the foreign tax credit.
C) The overall limitation is limited to the amount of tax that would be due on the foreign-source
income if it had been earned in the United States.
D) all of the options
61) Countries differ in how they tax foreign-source income of their domestic MNCs.
A) Therefore, different forms of structuring a multinational organization within a country can
result in different tax liabilities for the firm.
B) However, due to tax treaties and foreign tax credits, this is not an issue for a U.S.-based MNC.
C) But all countries tax domestic income of their domestic MNCs in the same way.
D) all of the options
62) A foreign branch is
A) an extension of the parent and is not an independently incorporated firm separate from the
parent.
B) an affiliate organization of the MNC that is independently incorporated in the foreign country,
and one in which the U.S. MNC owns at least 10 percent of the voting equity stock.
C) either a minority foreign subsidiary (an uncontrolled foreign corporation) or a controlled
foreign corporation.
D) an affiliate organization of the MNC that is independently incorporated in the foreign country,
and one in which the U.S. MNC owns at least 10 percent of the voting equity stock. In addition, a
foreign branch is either a minority foreign subsidiary (an uncontrolled foreign corporation) or a
controlled foreign corporation.
63) A foreign subsidiary is
A) an extension of the parent and is not an independently incorporated firm separate from the
parent.
B) an affiliate organization of the MNC that is independently incorporated in the foreign country,
and one in which the U.S. MNC owns at least 10 percent of the voting equity stock.
C) either a minority foreign subsidiary (an uncontrolled foreign corporation) or a controlled
foreign corporation.
D) an affiliate organization of the MNC that is independently incorporated in the foreign country,
and one in which the U.S. MNC owns at least 10 percent of the voting equity stock. In addition, a
foreign subsidiary is either a minority foreign subsidiary (an uncontrolled foreign corporation) or a
controlled foreign corporation.
64) An uncontrolled foreign corporation is
A) an extension of the parent and is not an independently incorporated firm separate from the
parent.
B) an affiliate organization of the MNC that is independently incorporated in the foreign country,
and one in which the U.S. MNC owns at least 51 percent of the voting equity stock.
C) an affiliate organization of the MNC that is independently incorporated in the foreign country,
and one in which the U.S. MNC owns at least 10 percent but less than 50 percent of the voting
equity stock.
D) an affiliate organization of the MNC that is independently incorporated in the foreign country,
and one in which the U.S. MNC owns at least 51 percent of the voting equity stock. In addition, an
uncontrolled foreign corporation is an affiliate organization of the MNC that is independently
incorporated in the foreign country, and one in which the U.S. MNC owns at least 10 percent but
less than 50 percent of the voting equity stock.
65) As a general rule,
A) excess tax credits can be carried back two years.
B) excess tax credits can be carried forward five years.
C) excess tax credits must be used in the year recognized.
D) excess tax credits can be carried back two years and can be carried forward five years.
66) An overseas affiliate of a U.S. MNC can be organized
A) as a branch.
B) as a subsidiary.
C) as a branch, as well as a subsidiary.
D) none of the options
67) When excess tax credits go unused, the foreign tax liability for a branch is greater than the
corresponding U.S. tax liability when the foreign income tax rate is greater than the U.S. rate.
Calculate the total tax liability for a wholly-owned subsidiary when excess tax credits cannot be
used in a country given:
U.S. tax rate = 35 percent
Foreign tax rate = 39 percent
Withholding tax rate = 5 percent
A) 44.00 percent
B) 35.00 percent
C) 43.36 percent
D) 42.05 percent
68) When excess tax credits go unused, the foreign tax liability for a branch is greater than the
corresponding U.S. tax liability when the foreign income tax rate is greater than the U.S. rate.
Calculate the total tax liability for a wholly-owned subsidiary when excess tax credits cannot be
used in a country given:
35%
U.S. tax rate
41%
Foreign tax rate
4%
Withholding tax rate
A) 35.00 percent
B) 37.00 percent
C) 43.36 percent
D) 42.05 percent
69) As a rule, payments to and from foreign affiliates
A) involve the issue of transfer pricing.
B) involve accounting values assigned to goods or services exchanged between foreign affiliates.
C) involve tax credits trading between affiliates.
D) involve the issue of transfer pricing, as well as accounting values assigned to goods or services
exchanged between foreign affiliates.
70) A transfer price
A) is the price that one division of a firm charges to another division of a firm.
B) is an accounting issue, not a finance issue.
C) does not involve actual cash flows, therefore does not impact the share price.
D) none of the options
71) Suppose a U.S.-based MNC makes bicycles with parts from its subsidiary in a low-tax East
Asian country. The bicycle frames are made here, the component parts (cranksets, wheels, and so
on) are made abroad, and the bicycles are assembled in Japan and reimported to the U.S. It can
reduce its reported U.S. income—and increase its subsidiary's profits—by
A) overcharging its subsidiaries for the U.S.-made frames.
B) undercharging its subsidiaries for the U.S.-made frames.
C) assembling the bicycles in the U.S.
D) none of the options
72) The higher the transfer price
A) the higher the net profit reported by the MNC.
B) the higher the gross profit of the receiving division relative to the transferring division.
C) the higher the gross profit of the transferring division relative to the receiving division.
D) none of the options
73) Affiliate A sells a million units to Affiliate B per year. The marginal income tax rate for
Affiliate A is 20 percent and the marginal income tax rate for Affiliate B is 50 percent. The transfer
price can be set at any level between $100 and $200. Which transfer price between A and B should
the parent select?
A) $200
B) $100
C) $150
D) none of the options
74) The U.S. IRS allows transfer prices to be set using the arms-length price.
A) This is a very straight-forward method to use in practice—just use the eBay price.
B) This method is difficult to apply in practice because many factors enter into the pricing of goods
and services. Examples include: differences in the terms of sale, differences in quantity and or
quality sold, even differences in location or date of sale.
C) all of the options
D) none of the options
75) The lower the transfer price,
A) the higher the net profit reported by the MNC.
B) the lower the gross profit of the transferring division relative to the receiving division.
C) the higher the gross profit of the receiving division relative to the transferring division.
D) none of the options
76) A "tax haven" country is one that has a low, or zero percent, national tax rates. Some of the
countries that fall into this category are
A) Bahamas, Bahrain, Bermuda, and the Cayman Islands.
B) Denmark, Norway, Switzerland, and Sweden.
C) Bulgaria, Canada, Saudi Arabia, and South Africa.
D) Congo, Egypt, Kuwait, and Zaire.
77) These days the benefits of "tax haven" subsidiaries have been reduced by
A) the present corporate income tax rate in the United States is not especially high in comparison
to most non-tax haven countries.
B) the rules governing controlled foreign corporations have effectively eliminated the ability to
defer passive income in a tax haven subsidiary.
C) all of the options
D) none of the options
78) A controlled foreign corporation (CFC) is
A) a foreign corporation established as an affiliate of a U.S. corporation for the purpose of
"buying" from the U.S. corporation property for resale and use abroad.
B) a foreign subsidiary that has more than 50 percent of its voting equity owned by U.S.
shareholders.
C) a separate domestic U.S. corporation actively engaged in business in a U.S. possession (Puerto
Rico and the U.S. Virgin Islands).
D) one that has no "overall limitation" in regards to its foreign tax credits.
79) The undistributed income of a minority foreign subsidiary of a U.S. MNC
A) is tax deferred until it is remitted via a dividend.
B) is taxed as imputed income.
C) is withheld under subpart U.S. income restrictions.
D) none of the options
80) There are three production stages required before a bicycle produced by MasiBicicletia S.A.
can be sold at retail for €4,500. The VAT rate is 15 percent. Find the total tax liability due.
Production Stage
Selling Price
Value Added
Incremental VAT
1
€
1,000
2
€
2,750
3
€
4,500
A) €525
B) €675
C) €3,500
D) none of the options
81) There are three production stages required before a bicycle produced by MasiBicicletia S.A.
can be sold at retail for €3,500. The VAT rate is 15 percent. Find the total tax liability due.
Production Stage
Selling Price
Value Added
Incremental VAT
1
€
1,000
2
€
1,750
3
€
3,500
A) €525
B) €150
C) €3,500
D) none of the options
82) If U.S. taxing authorities did not limit the amount of the foreign tax credit to the equivalent
amount of the U.S. tax
A) payers would arguably subsidize part of the tax liabilities of U.S. MNC's foreign earned
income.
B) national neutrality would suffer.
C) MNCs would all depart our shores.
D) all of the options
83) Active income is income
A) that results from production by the firm or individual (of goods or services).
B) earned by professional athletes.
C) that includes dividend and interest income, since the tax court has ruled that taking risk is a
form of work.
D) none of the options
84) The current U.S. marginal tax rate for domestic nonfinancial corporations is 35 percent.
A) This is positioned pretty well in the middle of the rates assessed by the majority of countries, as
reported in the PricewaterhouseCoopers annual Corporate Taxes: Worldwide Tax Summaries.
B) Is positioned toward the upper end of the rates assessed by the majority of countries.
C) But this is reduced on a dollar-for-dollar basis for any and all taxes paid to foreign governments,
so this is an upper limit for the tax rate faced by U.S. MNCs.
D) all of the options
85) Transfer pricing can have an effect on how divisions of an MNC are perceived by the local
banks. Which transfer price would leave a local affiliate that imports components from the parent
with less impressive financial statements?
A) High transfer price
B) Low transfer price
C) none of the options
86) For a parent that sells goods to a subsidiary, transfer pricing can have an effect on international
capital expenditure analysis. A very low markup policy makes the APV of a subsidiary's capital
expenditure appear
A) more attractive.
B) less attractive.
C) no impact.
D) none of the options
87) Transfer pricing can have an effect on share value
A) to the extent that financial markets are inefficient.
B) to the extent that security analysts do not understand the transfer pricing strategy being used.
C) to the extent that third parties benefit from the transfer price.
D) to the extent that financial markets are inefficient, as well as to the extent that security analysts
do not understand the transfer pricing strategy being used.
88) With an MNC
A) the decision to set a transfer price is further complicated by import duty considerations.
B) the decision to set a transfer price can be further complicated by exchange rate restrictions
imposed by governments.
C) the decision to set a transfer price is further complicated by tax considerations, if there is a
difference in tax rates between the host country and the home country.
D) all of the options
89) Using transfer prices "creativity" MNCs can
A) try to move blocked funds (but the host country might be watching).
B) evade tax liabilities (but the host country might be watching).
C) try to move blocked funds (but the host country might be watching), as well as evade tax
liabilities (but, again, the host country might be watching).
D) try to move blocked funds (but the host country might be watching), as well as evade tax
liabilities (but, again, the host country might be watching). There's nothing that the host country
government can do about it.
90) Suppose a U.S.-based MNC makes computers with parts from its subsidiary in a low-tax East
Asian country. It can reduce its reported U.S. income—and increase its subsidiary's profits—by
A) overpaying for the computer components.
B) underpaying for the computer components.
C) paying an arm's length price.
D) none of the options
91) The U.S. IRS allows transfer prices to be set using
A) comparable uncontrolled price method.
B) resale price method.
C) cost plus approach.
D) all of the options
92) When the income tax rate in the host country is greater than the tax rate in the parent country,
A) it is beneficial to follow a high markup policy on transferred goods and services from the parent
to a foreign affiliate.
B) it is beneficial to follow a low markup policy on transferred goods and services from the parent
to a foreign affiliate.
C) transfer pricing will not affect the total tax liability, net of foreign tax credit offsets.
D) none of the options
93) In the United States foreign-source income is taxed at the same rate as U.S.-earned income and
a foreign tax credit is given against taxes paid to a foreign government. However,
A) the foreign tax credit is limited to the amount of tax that would be due on that income if it were
earned in the United States.
B) if the tax rate paid on foreign-source income is greater than the U.S. tax rate, part of the credit
may go unused.
C) both of the options
D) none of the options
94) Suppose you are a citizen of the United States with foreign-source income. In the foreign
country the tax rate is 40 percent and your U.S. rate is 30 percent. For every $10,000 of
foreign-source income you will
A) receive a tax credit of $3,000.
B) receive a tax credit of $3,500.
C) receive a tax credit of $4,000.
D) receive a tax credit of $1,000.
95) You are a U.S. MNC with a 40 percent U.S. tax rate. You have an Irish subsidiary. The
corporate income tax there is 12½ percent. For every $10,000,000 of income the subsidiary
reports, you will owe taxes to the U.S. Treasury in the amount of
A) $4,000,000.
B) $1,250,000.
C) $2,750,000.
D) none of the options
96) In general the United States claims
A) only a limited taxing jurisdiction over nonresident alien individuals and foreign corporations.
B) unlimited taxing jurisdiction over nonresident alien individuals and foreign corporations.
C) unlimited taxing jurisdiction over resident alien individuals and foreign corporations.
D) none of the options
97) A tax haven is
A) a country that has a low corporate income tax rate and low withholding tax rates on passive
income.
B) a country with no taxes and no enforcement of foreign tax laws within its borders.
C) any country with a higher tax rate than available domestically.
D) none of the options
98) A tax inversion is
A) a country that has a low corporate income tax rate and low withholding tax rates on passive
income.
B) a maneuver in which a firm (usually U.S.) acquires or merges with a foreign rival incorporated
in a low-tax country, then shifts its domicile abroad to reap tax benefits.
C) any country with a higher tax rate than available domestically.
D) none of the options
