CHAPTER 15
MULTINATIONAL TAX MANAGEMENT
1. Primary Objective. What is the primary objective of multinational tax planning?
2. Tax Morality. What is meant by the term “tax morality”? If for example, your company has a
subsidiary in Russia where some believe tax evasion is a fine art, should you comply with Russian tax
laws or violate the laws as do your local competitors?
The MNE faces not only a morass of foreign taxes but also an ethical question. In many countries,
3. Tax Neutrality. What is tax neutrality? What is the difference between domestic neutrality and
foreign neutrality?
4. Worldwide versus Territorial. What is the difference between the worldwide and territorial
approaches to taxation?
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not address the income earned by foreign firms operating within the United States. Countries like the
United States then apply the principle of territorial taxation to foreign firms within their legal
jurisdiction, taxing all income earned by foreign firms in their borders as well.
The territorial approach, also termed the source approach, focuses on the income earned by firms
within the legal jurisdiction of the host country, not on the country of firm incorporation. Countries
like Germany that follow the territorial approach apply taxes equally to foreign or domestic firms on
income earned within the country, but in principle not on income earned outside the country. The
territorial approach, like the worldwide approach, results in a major gap in coverage if resident firms
earn income outside the country but are not taxed by the country in which the profits are earned. In
this case, tax authorities extend tax coverage to income earned abroad if it is not currently covered by
foreign tax jurisdictions. Once again, a mix of the two tax approaches is necessary for full coverage of
income.
5. Direct or Indirect. What is the difference between a direct tax and an indirect tax?
6. Tax Deferral. What is meant by tax deferral in the U.S. system of taxation? What is the deferral
privilege?
7. Value-Added Tax. What is a value-added tax, and how does it differ from an income tax?
8. Withholding Tax. What is a withholding tax, and why do governments impose them?
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and the taxes withheld are then turned over to government authorities. Withholding taxes are a major
subject of bilateral tax treaties and generally range between 0% and 25%.
9. Tax Treaty. What is usually included within a tax treaty?
Tax treaties normally define whether taxes are to be imposed on income earned in one country by the
10. Active versus Passive. What do the terms active and passive mean in the context of U.S. taxation of
foreign source income?
Active income, the income arising from manufacturing or provision of services, is difficult to shift
across borders by ownership. Passive income, however, is more easily shifted and therefore may gain
11. Tax Types. Taxes are classified based on whether they are applied directly to income, called direct
taxes, or to some other measurable performance characteristic of the firm, called indirect taxes.
Identify each of the following as a “direct tax,” an “indirect tax,” or something else:
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d. Interest received by a U.S. parent on a loan to a subsidiary in Mexico—Direct tax
e. Principal repayment received by U.S. parent from Belgium on a loan to a wholly owned
subsidiary in Belgium—Not a tax
f. Excise tax paid on cigarettes manufactured and sold within the United States—Indirect tax
g. Property taxes paid on the corporate headquarters building in Seattle—Indirect tax
h. A direct contribution to the International Committee of the Red Cross for refugee relief—Not a
tax
i. Deferred income tax, shown as a deduction on the U.S. parent’s consolidated income tax—Direct
tax
j. Withholding taxes withheld by Germany on dividends paid to a United Kingdom parent
corporation—Direct tax
12. Foreign Tax Credit. What is a foreign tax credit? Why do countries give credit for taxes paid on
foreign source income?
To prevent double taxation of the same income, most countries grant a foreign tax credit for income
13. Earnings Stripping. What is earnings stripping, and what are some examples of how multinational
firms pursue it?
14. Controlled Foreign Corporation. What is a controlled foreign corporation and what is its
significance in global tax management?
15. Transfer Pricing. 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?
16. Fund Positioning. What is fund positioning?
17. Income Tax Effect. What is the income tax effect, and how may a multinational firm alter transfer
prices as a result of the income tax effect?
18. Correct Pricing. What is Section 482 of the U.S. Internal Revenue Code, and what guidelines does it
recommend when setting transfer prices?
19. Cross-Crediting. Define cross-crediting and explain why it may or may not be consistent with a
worldwide tax regime.
Cross-crediting is the ability to cross-credit foreign tax credits with foreign tax deficits in the same
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or passive), the excess foreign tax credits from one can be cross-credited against the foreign tax
deficits of the other.
20. Check-the-Box. Explain how the check-the-box regulatory change altered the effectiveness of
Subpart F income regulations.
In 1997, the U.S. Treasury attempted to simplify U.S. taxes by introducing what is called check-the-
21. Measuring Managerial Performance. What role does transfer pricing have within multinational
companies when measuring management performance? How can transfer pricing practices within a
firm conflict with performance measurement?
22. Tax Haven Subsidiary. What is a tax haven? Is it the same thing as an international offshore
financial center? What is the purpose of a multinational creating and operating a financial subsidiary
in a tax haven?
23. Corporate Inversion. What is a corporate inversion, and why do many U.S. corporations want to
pursue it although it is highly criticized by public and private parties alike?