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43. In order to qualify for the favorable tax treatment of a Foreign Sales Corporation, a U.S. firm must meet all of the
following tests, except:
a. At least one director must be a nonresident of the U.S.
b. Its income must be derived from qualified export activity such as the sale of goods abroad.
c. Management must be outside the U.S.
d. None of the income may be repatriated to the United States.
e. The FSC must participate in soliciting, negotiating, or contracting with a foreign buyer.
44. All of the following are alternative methods for a U.S. investor entering into a joint venture in a foreign country
except:
a. A foreign partnership.
b. A foreign corporation.
c. A U.S. corporation with a foreign branch.
d. A foreign expropriation.
45. The vehicle of choice most often for a U.S. investor who wishes to exercise a measure of control over its foreign
investment is a(n):
a. Interlocking directorate.
b. Investment trust.
c. Joint venture.
d. All of the above.
46. The precise shape of the structure to be pursued by a U.S. active investor - branch, subsidiary, etc. - in a foreign
country depends largely on the tax treatment of the host country and U.S. laws. In many cases:
a. No taxes will be owed.
b. Remittances from branches are taxed at a higher rate than dividends from a subsidiary.
c. Profits are taxed at a lower rate due to depreciation schedules of certain countries.
d. None of the above.
47. If a foreign investor is prohibited by the host country's laws from owning a majority of a joint venture, another way to
gain operational control is:
a. Secretly to have other foreign nationals invest money in trust for the investor.
b. To use American management techniques with cumulative voting for the board of directors.
c. To surround the joint venture with contractual obligations to the foreign investor.
d. A and C.
48. A U.S. enterprise that wishes to establish an entity abroad under its control may create a subsidiary or branch:
I.
Once either of these is established, the company may waive Rights of Protection under the
U.S. bilateral investment protection agreements.
II.
If the company chooses a subsidiary, it will not be directly answerable for liability.
a. I only.
b. II only.
c. Both I and II.
d. Neither I nor II.
49. When choosing to establish a foreign branch or subsidiary, a prime factor in the U.S. company's decision is:
a. The tax rates applicable to different forms of organizations.
b. The investment tax credit given by the foreign country.
c. Whether the foreign taxes are creditable taxes for U.S. purposes.
d. Both A and C.
50. Developing countries usually welcome foreign investment in which of the following cases:
a. Companies producing quality consumer goods because these firms bring a variety of needed products at
reasonable prices for consumers.
b. Companies producing goods for export.
c. Companies investing in telecommunications and transportation industries.
d. Companies investing in the oil and gas industry and other natural resources.
51. In order to maintain operational control over a joint venture, the foreign partner may enter into which of the
following:
a. Marketing agreements.
b. Supply agreements.
c. Contracts with management.
d. Maintain veto power in the joint venture agreement.
e. All of the above.
52. If a U.S. firm creates a foreign subsidiary corporation, it:
a. Fully subjects it to income taxation in the foreign country.
b. Fully avoids taxation in the United States on income repatriated from the foreign subsidiary.
c. Will significantly reduce its taxable income.
d. None of the above.
53. In order to avoid double taxation on the income of foreign subsidiary companies, U.S. tax law:
a. Does not tax income repatriated to the U.S. parent company.
b. Allows the U.S. parent company to take a 100 percent tax credit for foreign income taxes paid.
c. Provides a deduction for foreign income taxes paid.
d. None of the above. U.S. companies are usually subject to double taxation when they have foreign
subsidiaries.
54. Under the Foreign Sovereign Immunities Act, federal courts in the U.S. cannot hear which of the following cases:
a. The foreign government breached a contract with the U.S. firm for the sale of goods.
b. A dispute over the amount of compensation paid by a foreign government to a U.S. investor when the
investor's real estate was taken to build a national airport.
c. The foreign government is being sued for money damages sought as a result of personal injury or death
caused by the foreign government or its agents in the United States.
d. All of the above are exceptions.
55. Where the government expropriates property, the former owner will receive:
a. The same amount of compensation as a victim of nationalization.
b. A higher amount than a victim of nationalization.
c. A lower amount than a victim of nationalization.
d. A, B, or C.
e. A or B.
56. Which is not a type of adjustment to regulations often addressed in privatizations?
a. Exemptions from taxation.
b. Exemptions from regulations affecting tariffs, rates of return and technical standards.
c. Right of first refusal rights in future privatization efforts.
d. Remittance rights on capital and other exemptions from regulations relating to repatriation of profits and
exchange rates.
57. Under the modern traditional theory of the taking of property, a sovereign may take private property only where:
a. The property is taken for a public purpose.
b. The taking is nondiscriminatory.
c. The taking is accompanied by a prompt, adequate, and effective compensation.
d. All of the above.
58. Modern traditional theories of the taking of private property are followed by:
a. Most developed industrialized countries.
b. Most developing countries.
c. Most communist countries.
d. All of the above.
59. When private property is seized gradually by a foreign government, it is known as:
a. Crawling expropriation.
b. Creeping expropriation.
c. Gradual encroachment.
d. None of the above.
60. International investment disputes are arbitrated by:
a. The International Chamber of Commerce.
b. The International Centre for the Settlement of Investment Disputes.
c. The United Nations.
d. All of the above.
e. A and B only.
61. Under the modern traditional theory, the sovereign may nationalize foreign-owned property only where:
a. It is for a public purpose.
b. The foreign firm that owned the property was operating it unprofitably.
c. A communist government takes over the country.
d. The foreign firm has continuously violated the laws of the host country.
62. Under the modern traditional theory, the sovereign may nationalize foreign-owned property only where:
a. It is done promptly.
b. It is done in a reasonable manner.
c. It is done after the foreign firm has been convicted of criminal behavior in the host country.
d. It is done in a nondiscriminatory fashion.
63. Political risk or investment insurance is available in the United States through a U.S. government agency known as:
a. The Overseas Public Investment Commission.
b. The Overseas Private Investment Corporation.
c. The Open Private Insurance Corporation.
d. The Overseas Panel for Insurance Coverage.
64. The difficulties associated with private political risk insurance include all of the following except:
a. It is difficult to obtain.
b. It is very costly.
c. The approval process is slower than with public insurance agencies.
d. The terms of many private political risk policies are limited to a very short period of time.
65. Under the Foreign Sovereign Immunities Act, a federal court would not have jurisdiction over a foreign nation unless:
a. The foreign nation's acts were diplomatic in nature.
b. Authority has been granted for the court to hear the case by the president of the United States.
c. The foreign government's actions constitute a commercial activity.
d. The foreign government committed an act of state.
66. A foreign investor may take a case against a foreign government to arbitration where:
a. The arbitration has been ordered by the president.
b. The Foreign Sovereign Immunities Act requires it.
c. The act of state doctrine requires it.
d. The foreign nation consents to it.
e. All of the above.
Subjective Short Answer
67. Assess the arguments for and against taxing e-commerce at an international level as opposed to a domestic level.
68. Compare and contrast different types of passive investments and the risks and benefits associated with each.
69. Identify countries that have views regarding the taxation of e-commerce that are most (or least) favorable to U.S. e-
merchants.
70. Considering the different types of currency risk associated with foreign transactions, which is most salient for a U.S.
business?
71. Weigh the strengths and weaknesses of the various methods that a business may use to ensure access to hard
currency.
72. Weigh the relative benefits and detriments of changing from a sales tax to a value-added tax. What other information
would be important to you in making this assessment?
73. Compare and contrast the traditional and modern traditional theory of takings.
74. Compare and contrast the partial sale, trade sale, and concession models of privatization.
75. Explain the differences among the three main theories of compensation for government takings of foreign-owned
properties.
76. Explain and assess the different methods that a business may employ to reduce the political risk associated with a
foreign investment.
77. Weigh the relative benefits of political risk insurance from government agencies and private insurers.
78. Write a treaty provision regarding the taxation of e-commerce.
79. Write a memo to the legislature advocating the adoption of a particular tax exemption system.
80. Suppose that you plan to set up a subsidiary in a foreign country. Devise a list of the types of tax incentives you seek
to accrue.
81. Presume that you are considering investing in a foreign business/industry that is about to undergo government
privatization. Draft a set of negotiation objectives you wish to address with the government.
82. Draft a model law (plan or treaty) for government privatization. This may be done with an eye toward privatizing
through national or foreign investment.
83. California Agricultural Aircraft Services, Inc. (CAAS) is a California corporation headquartered in Sacramento.
CAAS leases aircraft to crop dusting businesses through California. CAAS entered into a contract with Shànghai
Aircraft Company (SAC), a state-owned enterprise organized pursuant to the laws of the People's Republic of
China. The contract provided for the manufacture by SAC and purchase by CAAS of ten crop dusting aircraft at a
price of U.S. $2.1 million, a savings of approximately $200,000 compared to crop dusting aircraft available from
other manufacturers. One of the aircraft delivered to CAAS was subsequently leased to Central Valley Crop
Dusting, Inc. (CVCD), a California corporation. One month later, this aircraft crashed during a CVCD spraying
operation resulting in a complete loss of the aircraft and serious injuries to the pilot. The pilot stated that the engine
lost power and then caught on fire while he was attempting an emergency landing. Subsequent investigations by
federal and state authorities determined the sole cause of the crash to be catastrophic engine failure. CVCD and its
pilot subsequently initiated litigation in the San Joaquin County Superior Court against CAAS, claiming breach of
numerous provisions within the lease agreement, strict product liability and negligence. CAAS immediately notified
SAC regarding the litigation and requested indemnification, but SAC did not respond to this request. CAAS is now
contemplating joining SAC as a co-defendant to CVCD's lawsuit.
What defense could SAC assert to the exercise of personal jurisdiction by the San Joaquin County Superior Court?
What does this defense provide? Would this defense be successful in this case? Why or why not?
