Deck 15: Taxes and Multinational Corporate Strategy

Question 1

Income from a foreign branch is taxed by the U.S. government at the time the funds are repatriated to the U.S. parent corporation.

Answer 1

False

Question 2

Earnings from foreign corporations that are between 10% and 50% owned by a U.S. parent are called Subpart F income.

Answer 2

True

Question 3

Since the passage of the Tax Reform Act (TRA) of 1986, the multinational corporation can ignore implicit taxes in its global site location decisions.

Answer 3

False

Question 4

In a(n) ______ tax system, the multinational's worldwide income is taxed by the home country as this income is repatriated to the parent company.

A) explicit
B) implicit
C) global
D) territorial
E) worldwide

Question 5

A neutral tax is one that is designed to have the least effect on gross national product.

Question 6

The law of one price requires that expected before-tax rates of return on comparable-risk assets are equal across all countries.

Question 7

If a nation's taxes conform to domestic tax neutrality, they also conform to foreign tax neutrality.

Question 8

International taxation is the overriding factor in global site location decisions.

Question 9

Income baskets in the U.S. tax code reduce the usefulness of excess foreign tax credits.

Question 10

Bilateral tax treaties ensure some consistency in the tax treatment of foreign-source income.

Question 11

The Model Treaty of the Organization for Economic Cooperation and Development identifies target corporate income tax rates for various nations.

Question 12

National tax policies influence each of the following characteristics (a through c) of the multinational corporation EXCEPT

A) the organizational forms in which multinational corporations choose to operate
B) the types and locations of assets held
C) the way in which the multinational corporation finances its operations
D) Each of the above is are influenced by national tax policies
E) National tax policy has little effect on any of the above

Question 13

Section 486 of the U.S. Internal Revenue Code requires transfer prices be set at par value.

Question 14

Bilateral tax treaties ensure that both domestic and foreign tax neutrality are upheld.

Question 15

_____ tax neutrality ensures that incomes arising from foreign and from domestic operations are taxed similarly by the domestic government.

A) Domestic
B) Foreign
C) Global
D) two or more of the above
E) None of the above

Question 16

The objective of foreign tax neutrality is to ensure that taxes imposed on the foreign operations of domestic companies are similar to those facing local competitors in the host countries.

Question 17

_______ tax neutrality ensures that taxes imposed on the foreign operations of domestic companies are similar to those facing local competitors in the host countries.

A) Domestic
B) Foreign
C) Global
D) two or more of the above
E) None of the above

Question 18

Value added taxes are a form of implicit tax.

Question 19

The law of one price imposes an implicit tax on assets in low-tax jurisdictions.

Question 20

Domestic tax neutrality attempts to put the foreign and domestic operations of domestically based multinational corporations on an even footing.

Question 21

Foreign operations are more likely to be set up as a foreign branch when ______.

A) bribes are a common business practice in the foreign country
B) disclosure requirements in the foreign country are high
C) earnings are expected to be negative in the early years of operations
D) the potential for litigation over foreign operations is high
E) None of the above

Question 22

Withholding taxes on distributions to non-residents are most frequently found on which income category?

A) assets
B) capital gains
C) dividends
D) royalties
E) value-added

Question 23

In a(n) _______ tax system, only domestic income is taxed by the domestic government. Foreign-source income is not taxed as long as it is earned in an active business.

A) explicit
B) implicit
C) global
D) territorial
E) worldwide

Question 24

Tax rates in countries B and S are t_B = 40% and t_S = 25%, respectively. Pre-tax required returns in B are i_B = 25%. What should be the pre-tax required return in S?

A) 5%
B) 10%
C) 15%
D) 20%
E) None of the above

Question 25

If a U.S. parent corporation owns more than 50% of a foreign corporation either in terms of market value or voting power, the foreign subsidiary is called a ______.

A) controlled foreign corporation
B) foreign affiliate
C) foreign sales branch
D) wholly-owned subsidiary
E) None of the above

Question 26

Reinvoicing centers should be located in countries with each of the following EXCEPT

A) access to Eurocurrency markets
B) low explicit taxes
C) low implicit taxes
D) sound physical and legal infrastructure
E) a volatile currency

Question 27

Suppose Belgium imposes a 34% tax on corporate income and Japan imposes a 41% tax rate. Pretax returns in Belgium are 15%. If the law of one price holds, pretax returns in Japan are ______.

A) 12.27%
B) 16.78%
C) 22.33%
D) 32.98%
E) 36.56%

Question 28

Implicit taxes arise from ______.

A) a failure to hide income from the taxing authorities
B) a nation's labor laws
C) the law of one price
D) value additivity
E) None of the above

Question 29

Active income includes each of the following EXCEPT

A) dividends received from active subsidiaries
B) dividends received from less-than-10% owned companies
C) income from active foreign branches
D) interest received from more-than-50% owned subsidiaries
E) management fees received from active subsidiaries

Question 30

Implicit taxes include which of the following?

A) asset taxes
B) higher pre-tax required returns in countries with high tax rates
C) income taxes
D) value-added taxes
E) None of the above

Question 31

Pretax returns in Malaysia are 18%. Pretax returns on comparable assets in Nauru are 20.215%. Malaysia's tax rate is 27%. In equilibrium, Nauru's tax rate would be ______.

A) 20%
B) 25%
C) 30%
D) 35%
E) 40%

Question 32

Which of a) through d) is NOT a form of explicit tax?

A) asset taxes
B) tariffs on cross-border trade
C) value-added taxes
D) withholding taxes
E) All of the above are explicit taxes

Question 33

Value-added taxes are a form of ______.

A) capital gains tax
B) implicit tax
C) income tax
D) sales tax
E) tariff on cross-border trade

Question 34

The intent of the foreign tax credit is to ______.

A) avoid double taxation of foreign-source income
B) ensure national sovereignty
C) ensure that foreign multinationals pay their fair share of the tax burden
D) pay for social programs
E) None of the above

Question 35

Active income earned from a foreign branch is taxed by the U.S. government ______.

A) after pooling this income with all other income sources
B) as funds are repatriated to the U.S. parent corporation
C) as it is earned in the foreign country
D) at the foreign tax rate
E) None of the above

Question 36

A U.S.-based corporation has $8,000 in total foreign tax credits (FTC) on a consolidated basis. The firm's overall FTC limitation is $5,000. What is the firm's U.S. tax liability or excess FTC?

A) $0
B) $3,000
C) $5,000
D) $8,000
E) the firm has $3,000 in excess FTCs that can be carried back or forward

Question 37

Foreign branches of a U.S. corporation are treated as ______.

A) a domestic corporation
B) a controlled foreign corporation
C) a part of the parent rather than as a separate legal entity
D) slaves to the master corporation
E) None of the above

Question 38

The overall FTC limitation applies to ______.

A) consolidated foreign-source income
B) consolidated global income
C) domestic as well as foreign corporations
D) passive investment income
E) None of the above

Question 39

The usefulness of U.S. foreign tax credits (FTCs) is limited by each of a) through d) EXCEPT

A) the allocation of income rules
B) income baskets
C) the overall FTC limitation
D) Subpart F income
E) All of the above limit the usefulness of foreign tax credits

Question 40

Active management of transfer prices is likely to be the most advantageous when ______.

A) assets are tangible rather than intangible
B) gross operating margins are low
C) intermediate products have no market price
D) operations are in a single tax jurisdiction
E) transactions are between unrelated parties

Question 41

Relative to local (foreign) competition, foreign-source income is least valuable to a U.S.-based firm when ______.

A) the income is from a low-tax country and the firm has excess foreign tax credits
B) the income is from a high-tax country and the firm has excess foreign tax credits
C) the income is from a low-tax country and the firm has no excess foreign tax credits
D) the income is from a high-tax country and the firm has no excess foreign tax credits
E) None of the above

Question 42

Relative to local (foreign) competition, foreign-source income is most valuable to a U.S.-based firm when ______.

A) the income is from a low-tax country and the firm has excess foreign tax credits
B) the income is from a high-tax country and the firm has excess foreign tax credits
C) the income is from a low-tax country and the firm has no excess foreign tax credits
D) the income is from a high-tax country and the firm has no excess foreign tax credits
E) None of the above