Term
CH 11 Exercise
In deciding whether to establish a foreign corporation, which factor(s) might a multinational corporation (MNC) consider?
(a) After-tax returns from competing investment locations
(b) The tax treatments of branches versus subsidiaries
(c) Withholding rates on dividend and interest payments
(d) All of the above |
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Definition
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Term
CH 11 Exercise
Why might a company involved in international business find it beneficial to establish an operation in a tax haven?
(a) The OECD recommends the use of tax havens for corporate income tax avoidance
(b) Tax havens never tax corporate income
(c) Tax havens are jurisdictions that tend to have abnormally low corporate income tax rates
(d) Tax havens’ banking systems are less secretive |
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Definition
(c) Tax havens are jurisdictions that tend to have abnormally low corporate income tax rates |
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Term
CH 11 Exercise
Which of the following item(s) might provide an MNC with a tax-planning opportunity as it decides where to locate a foreign operation?
(a) Differences in corporate tax rates across countries
(b) Differences in local tax rates across countries
(c) Whether a country offers a tax holiday
(d) All of the above |
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Definition
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Term
CH 11 Exercise
Why might companies have an incentive to finance their foreign operations with as much debt as possible?
(a) Interest payments are generally tax deductible
(b) Withholding rates are lower for dividends
(c) Withholding rates are lower for interest
(d) Both (a) and (c) |
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Definition
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Term
CH 11 Exercise
Kerry is a U.S. citizen residing in Portugal. Kerry receives some investment income from Spain. Why might Kerry be expected to pay taxes on the investment income to the United States?
(a) The United States taxes its citizens on their worldwide income
(b) The United States taxes it citizens on the basis of residency
(c) Portugal requires all of its residents to pay taxes to the United States
(d) None of the above |
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Definition
(a) The United States taxes its citizens on their worldwide income |
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Term
CH 11 Exercise
Poole Corporation is a U.S. company with a branch in China. Income earned by the Chinese branch is taxed at the Chinese corporate income tax rate of 25 percent and at the rate of 35 percent in the United States. What is this an example of?
(a) Capital-export neutrality
(b) Double taxation
(c) A tax treaty
(d) Taxation on the basis of consumption |
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Definition
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Term
CH 11 Exercise
What are the two most common methods of eliminating the double taxation of income earned by foreign corporations?
(a) Exempting foreign source income and deducting all foreign taxes paid
(b) Deducting all foreign taxes paid and providing a foreign tax credit
(c) Exempting foreign source income and providing a foreign tax credit
(d) Deducting all foreign taxes paid and tax havens |
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Definition
(b) Deducting all foreign taxes paid and providing a foreign tax credit |
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Term
CH 11 Exercise
Jordan Inc., a U.S. company, is required to translate the foreign income generated by its foreign operation. To determine U.S. taxable income, what must Jordan use to translate the income of its foreign branch into U.S. dollars?
(a) The exchange rate at the end of the year
(b) The average exchange rate for the year
(c) The exchange rate at the beginning of the year
(d) The previous years’ ending exchange rate
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Definition
(b) The average exchange rate for the year |
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Term
CH 11 Exercise
Bush Inc. has total income of $500,000. Bush’s Polish branch has foreign source income of $200,000 and paid taxes of $38,000 to the Polish government. The U.S. corporate tax rate is 35 percent. What is Bush’s overall foreign tax credit limitation?
(a) $70,000
(b) $175,000
(c) $150,000
(d) $38,000 |
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Definition
(a) $70,000
(200,000/500,000) x (500,000 x 35%) = 70,000 |
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Term
CH 11 Exercise
Information for Year 1, Year 2, and Year 3 for the Andean branch of Powell Corporation is presented in the following table. The corporate tax rate in the Andean Republic in Year 1 was 25 percent. In Year 2, the Andean Republic increased its corporate income tax rate to 29 percent. In Year 3, the Andean Republic increased its corporate tax rate to 36 percent. The U.S. corporate tax rate in each year is 35 percent.
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Year 1
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Year 2
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Year 3
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Foreign source income
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$75,000
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$100,000
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$100,000
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Foreign taxes paid
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18,750
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29,000
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36,000
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U.S. tax before FTC
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26,250
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35,000
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35,000
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1. For Year 1, Year 2, and Year 3, what is the foreign tax credit allowed in the United States?
(a) $7,500, $6,000, and $0
(b) $18,750, $29,000, and $36,000
(c) $75,000, $100,000, and $100,000
(d) $18,750, $29,000, and $35,000
2. For Year 3, what is the net U.S. tax liability?
(a) $35,000
(b) $0
(c) $1,000
(d) $6,000
3. In Year 3, how much excess foreign tax credit can Powell carry back?
(a) $7,500
(b) $6,000
(c) $1,000
(d) $0 |
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Definition
1. (d) $18,750, $29,000, and $35,000
2. (b) $0
3. (c) $1,000
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Term
CH 12 Exercise
1. Which of the following objectives is not achieved through the use of lower transfer prices?
(a) Improving the competitive position of a foreign operation.
(b) Minimizing import duties
(c) Protecting foreign currency cash flows from currency devaluation
(d) Minimizing income taxes when transferring to a lower-tax country |
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Definition
(c) Protecting foreign currency cash flows from currency devaluation |
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Term
CH 12 Exercise
Which of the following methods does U.S. tax law always require to be used in pricing intercompany transfers of tangible property?
(a) Comparable uncontrolled price method
(b) Comparable profits method
(c) Cost-plus method
(d) Best method |
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Definition
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Term
CH 12 Exercise
1. Which international organization has developed transfer pricing guidelines that are used as the basis for transfer pricing laws in several countries?
(a) World Bank
(b) Organization for Economic Cooperation and Development
(c) United Nations
(d) International Accounting Standards Board |
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Definition
(b) Organization for Economic Cooperation and Development |
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Term
CH 12 Exercise
Which of the following types of transaction is most likely to be audited?
(a) Sales of tangible property
(b) Licenses of intangible property
(c) Intercompany loans
(d) Intercompany services |
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Definition
(d) Intercompany services |
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Term
CH 12 Exercise
Which of the following is not a method commonly used for establishing transfer prices?
(a) Cost-based transfer price
(b) Negotiated price
(c) Market-based transfer price
(d) Industry wide transfer price |
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Definition
(d) Industry wide transfer price |
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Term
CH 12 Exercise
Market-based transfer prices lead to optimal decisions in which of the following situations?
(a) When interdependencies between the related parties are minimal
(b) When there is no advantage or disadvantage to buying and selling the product internally rather than externally
(c) When the market for the product is perfectly competitive
(d) All of the above |
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Definition
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Term
CH 12 Exercise
1. U.S. Treasury Regulations require the use of one of five specified methods to determine the arm’s-length price in a sale of tangible property. Which of the following is not one of those methods?
(a) Cost-plus method
(b) Market-based method
(c) Profit split method
(d) Resale price method |
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Definition
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Term
CH 12 Exercise
Which group has negotiated the greatest number of advance parking agreements with the U.S. Internal Revenue Service (IRS)?
(a) Foreign parent companies with branches and subsidiaries in the United States
(b) U.S. parent companies with branches and subsidiaries in Canada and Mexico
(c) U.S. parent companies with branches and subsidiaries in Japan
(d) None of the above |
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Definition
(a) Foreign parent companies with branches and subsidiaries in the United States |
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Term
CH 12 Exercise
1. The IRS has the authority to impose penalties on companies that significantly underpay taxes a result of inappropriate transfer pricing. Acme Company transfers a product to foreign affiliate at $15 per unit, and the IRS determines the correct price should have been $65 per unit. The adjustment results in an increase in U.S. tax liability of $1,250,000. Due to this change in price, “what amount of penalty for underpayment of taxes as a result of an inappropriate transfer price will Acme Company pay?”
(a) $0
(b) $125,000
(c) $250,000
(d) $500,000 |
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Definition
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Term
CH 12 Exercise
Babcock Company manufactures fast-baking ovens in the United States at a production cost of $500 per unit and sells them to uncontrolled distributors in the United States a wholly owned sales subsidiary in Canada. Babcock’s U.S. distributors sell the ovens to restaurants at a price of $1,000, and its Canadian subsidiary sells the oven at a price of $1,100. Other distributors of ovens to restaurants in Canada normally earn a gross profit equal to 25 percent of selling price. Babcock’s main competitor in the United States sells fast-baking ovens at an average 50 percent markup on cost. Babcock’s Canadian sales subsidiary incurs operating costs, other than cost of goods sold, that average $250 per oven sold. The average operating profit margin earned by Canadian distributors of fast-baking ovens is 5 percent.
1. Which of the following would be an acceptable transfer price under the resale price method?
(a) $700
(b) $750
(c) $795
(d) $825
2. Which of the following would be an acceptable transfer price under the cost-plus method?
(a) $700
(b) $750
(c) $795
(d) $825
3. Which of the following would be an acceptable transfer price under the comparable profits method?
(a) $700
(b) $750
(c) $795
(d) $825 |
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Definition
1. (d) $825 (1100 - (1100 x 25%))
2. (b) $750 (500 + (500 x 25%))
3. (c) $795 (1100 - 250 - 55) |
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