Multinational Business Finance, 14e (Eiteman)
Chapter 15 Multinational Tax Management
15.1 Tax Principles
1) 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
2) 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.
3) 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
4) 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.
5) 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
6) 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
7) 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
8) 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 ______ in the country of incorporation.
A) 75%.
B) 62.5%.
C) 0%.
D) 50%.
9) The territorial approach to taxation policy is also termed the ________ approach.
A) source
B) ethical
C) greedy
D) location
10) 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
11) 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
12) 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
13) 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
14) The primary objective of multinational tax planning is to minimize the firm’s worldwide tax
burden.
15) A country CANNOT have both a territorial and a worldwide approach as a national tax
policy.
16) Tax treaties generally have the effect of increasing the withholding taxes between the
countries that are negotiating the treaties.
17) A value-added tax has gained widespread usage in Western Europe, Canada, and parts of
Latin America.
18) All indications are that the value-added tax will soon be the dominant form of taxation in the
U.S.
19) 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.
20) 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.
21) The ideal tax should not only raise revenue efficiently but also have as few negative effects
on economic behavior as possible.
22) 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).
23) 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).
24) Of the OECD 30 countries, most employ a worldwide approach to tax policy, but a few,
including the United States, use the worldwide approach.
25) FEW governments rely on income taxes, both personal and corporate, for their primary
revenue source.
26) Between 2006 – 2012, global corporate tax rates have trended upward.
27) Tax treaties typically result in reduced withholding tax rates between the two signatory
countries.
28) 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.
29) 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?
15.2 Multinational Tax Management
TABLE 15.1
Use the information to answer following question(s).
BayArea Designs Inc., located in Northern California, has two international subsidiaries, one
located in the Ukraine, the other in Korea. Consider the information below to answer the next
several questions.
1) 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 = ($30,000)
B) Ukraine = $100,000; Korea = $0
C) Ukraine = $0; Korea = $66,250
D) none of the above
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?
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?
15.4 Google: An Illustrative Case of Profit Repositioning
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?
15.5 Corporate Inversion
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?