Exam
Name___________________________________
TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.
1) An income tax is a direct tax. 1) Answer: True False Topic: Income Tax
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the quest
2) The two main objectives of taxation are 2)
A) tax neutrality and tax equity.
B)progressive taxation and tax neutrality. C) complexity and revenue.
D) social engineering and tax equity. Answer:A
Topic: The Objectives of Taxation
3) The three basic types of taxation are 3)
A) personal tax, corporate tax, and operating tax.
B)withholding tax, value-added tax, and corporate tax.
C) income tax, withholding tax, and business tax.
D) income tax, withholding tax, and value-added tax. Answer:D
Topic: The Objectives of Taxation
4) Tax neutrality is determined 4) A) by three criteria. B)by four criteria. C) by one criterion. D) by two criteria. Answer:A Topic: Tax Neutrality
5) Tax neutrality is determined by three criteria: which of the following doesn't belong? 5) A) National neutrality B)Income neutrality C) Capital-export neutrality D) Capital-import neutrality Answer:B Topic: Tax Neutrality 1 6) Tax neutrality 6)
A) has its foundations in the principles of economic efficiency and equity.
B)is determined by three criteria: capital export neutrality, capital import neutrality and national neutrality.
C) can be a difficult principle to apply in practice. D) all of the options Answer:D Topic: Tax Neutrality
7) The idea that an ideal tax should be effective in raising revenue for the government but 7)
not have any negative effects on the economic decision-making process of the taxpayer is referred to as A) capital-import neutrality. B)capital-export neutrality. C) national neutrality. D) none of the options Answer:B Topic: Tax Neutrality
8) The idea that taxable income is taxed in the same manner by the taxpayer's national tax 8)
authority regardless of where in the world it is earned is referred to as A) national neutrality. B)capital-export neutrality. C) capital-import neutrality. D) none of the options Answer:A Topic: Tax Neutrality 9) Capital export neutrality 9)
A) is an example of Mercantilism.
B)is based on MNC home country economic efficiency.
C) is based on host country economic efficiency.
D) is a goal based on worldwide economic efficiency. Answer:D Topic: Tax Neutrality
10)The idea that the tax burden a host country imposes on the foreign subsidiary of an MNC 10)
should be the same regardless of the country in which the MNC is incorporated and the
same as that placed on domestic firms is earned is referred to as A) national neutrality. B)capital-import neutrality. C) capital-export neutrality. D) none of the options Answer:B Topic: Tax Neutrality 2 11)Capital export neutrality 11)
A) implies that the tax burden a host country imposes on the foreign subsidiary of the
MNC should be the same regardless of which country the MNC is incorporated and
the same as that placed on domestic firms.
B)is the criterion that an ideal tax should be effective in raising revenue of the
government and not have any negative effects on the economic decision-making process of the taxpayer.
C) requires that taxable income is taxed in the same manner by the taxpayer's national
tax authority regardless of where in the world it is earned. D) none of the options Answer:B Topic: Tax Neutrality 12)National neutrality 12)
A) requires that taxable income is taxed in the same manner by the taxpayer's national
tax authority regardless of where in the world it is earned.
B)is the criterion that an ideal tax should be effective in raising revenue of the
government and not have any negative effects on the economic decision-making process of the taxpayer.
C) implies that the tax burden a host country imposes on the foreign subsidiary of the
MNC should be the same regardless of which country the MNC is incorporated and
the same as that placed on domestic firms. D) none of the options Answer:A Topic: Tax Neutrality 13)Capital import neutrality 13)
A) requires that taxable income is taxed in the same manner by the taxpayer's national
tax authority regardless of where in the world it is earned.
B)is the criterion that an ideal tax should be effective in raising revenue of the
government and not have any negative effects on the economic decision-making process of the taxpayer.
C) implies that the tax burden a host country imposes on the foreign subsidiary of the
MNC should be the same regardless of which country the MNC is incorporated and
the same as that placed on domestic firms. D) none of the options Answer:C Topic: Tax Neutrality 3
14)The term "capital-import neutrality" refers to 14)
A) the criterion that an ideal tax should be effective in raising revenue for the
government and not have any negative effects on the economic decision-making process of the taxpayer.
B)the criterion that the tax burden a host country imposes on the foreign subsidiary of
an MNC should be the same regardless in which country the MNC is incorporated
and the same as that placed on domestic firms.
C) the fact that taxable income is taxed in the same manner by the taxpayer's national
tax authority regardless of where in the world it is earned.
D) the underlying principle that all similarly situated taxpayers should participate in the
cost of operating the government according to the same rules. Answer:B Topic: Tax Neutrality
15)The criteria of tax neutrality: capital export neutrality, capital import neutrality and 15) national neutrality
A) are all consistent with one another.
B)are all identical with one another.
C) are not always consistent with one another. D) none of the options Answer:C Topic: Tax Neutrality
16)Implementing capital import neutrality means that 16)
A) a sovereign government follows the taxation policies of foreign tax authorities on
the foreign-source income of its resident MNCs.
B)the tax burden a host country imposes on the foreign subsidiary of an MNC should
be the same as that placed on domestic firms.
C) the tax burden a host country imposes on the foreign subsidiary of an MNC should
be the same regardless of the country in which the MNC is incorporated. D) all of the options Answer:D Topic: Tax Neutrality 17)Tax equity means that 17)
A) regardless of the country in which an affiliate of an MNC earns taxable income, the
same tax rate and tax due date apply.
B)a dollar earned by a foreign affiliate is taxed under the same rules as a dollar earned
by a domestic affiliate of the MNC.
C) similarly situated taxpayers should participate in the cost of operating the
government according to the same rules. D) all of the options Answer:D Topic: Tax Equity 4
18)The underlying principle of tax equity is that 18)
A) all similarly situated taxpayers should participate in the cost of operating the
government according to the same rules.
B)all similarly situated taxpayers should participate in the cost of operating the government on an equal basis. C) none of the options Answer:A Topic: Tax Equity
19)If a dollar earned by a foreign affiliate is taxed under the same rules as a dollar earned by 19)
a domestic affiliate of the MNC, then we have achieved A) capital-export neutrality. B)national neutrality. C) capital-import neutrality. D) tax equity. Answer:D Topic: Tax Equity
20)The organizational form of an MNC can affect the timing of a tax liability. This means 20)
A) as long as, regardless of the country in which an affiliate of an MNC earns taxable
income, the same tax rates apply, then the tax due date doesn't matter.
B)the principle of tax equity might be violated.
C) tax timing will even out over a reporting cycle, so there is no big deal here. D) none of the options Answer:B Topic: Tax Equity
21)There are three basic types of taxation that national governments throughout the world 21) use:
A) import quotas, duties, and tariffs.
B)tariffs, ad valorem taxes, and income taxes.
C) property tax, wealth tax, and death tax.
D) income tax, withholding tax, and value-added tax. Answer:D Topic: Types of Taxation
22)An income tax is defined in your textbook as 22) A) an indirect tax.
B)being collected with a withholding tax. C) a direct tax. D) none of the options Answer:C Topic: Income Tax 5 23)Which statement is false? 23)
A) A withholding tax is a tax levied on passive income earned by an individual or
corporation of one country within the tax jurisdiction of another country.
B)Passive income includes dividends and interest income, and income from royalties,
patents, or copyrights paid to the taxpayer.
C) The current marginal U.S. income tax rate is positioned towards the lower end of
the rates assessed by the majority of other countries.
D) Active income is defined as income that results from production by the firm or
individual or from services that have been provided. Answer:C Topic: Income Tax
24)The current marginal U.S. income tax rate is positioned 24)
A) towards the upper end of the rates assessed by the majority of other countries.
B)towards the lower end of the rates assessed by the majority of other countries.
C) pretty well in the middle of the rates assessed by the majority of other countries. D) none of the options Answer:A Topic: Income Tax
25)A withholding tax is defined in your textbook as 25)
A) the money that the government takes for every worker's paycheck. B)social security taxes.
C) a tax levied on passive income earned by an individual (or corporation) of one
country within the tax jurisdiction of another county.
D) a tax levied on income earned by an individual (or corporation) of one country
within the tax jurisdiction of another county. Answer:C Topic: Withholding Tax
26)The purpose of a withholding tax 26)
A) is to assure the local tax authority that it will receive the tax due on all income
earned within its tax jurisdiction.
B)is to assure the local tax authority that it will receive the tax due on the passive
income earned within its tax jurisdiction.
C) is to assure the local tax authority that it will receive the tax due on the active
income earned within its tax jurisdiction. D) none of the options Answer:B Topic: Withholding Tax 6 27)A withholding tax is 27) A) a direct tax. B)an indirect tax.
C) both a direct and an indirect tax. D) none of the options Answer:B Topic: Withholding Tax
28)Withholding tax rates imposed through tax treaties are 28) A) bilateral. B)netted. C) multilateral. D) none of the options Answer:A Topic: Withholding Tax
29)The United States withholds ________ of passive income from taxpayers that reside in 29)
countries with which it does not have withholding tax treaties. A) 40 percent B)20 percent C) 30 percent D) 10 percent Answer:C Topic: Withholding Tax 30)A withholding tax 30)
A) assures the local tax authority that it will receive the tax due on the passive income
earned within its tax jurisdiction.
B)is borne by a taxpayer who did not directly generate the income that serves as the source of the passive income. C) is a direct tax on workers.
D) is borne by a taxpayer who did not directly generate the income that serves as the
source of the passive income, and also assures the local tax authority that it will
receive the tax due on the passive income earned within its tax jurisdiction. Answer:D Topic: Withholding Tax
31)Many countries have tax treaties with one another. These generally specify 31)
A) that withholding tax rates imposed through tax treaties are bilateral.
B)the two countries agree to impose the same tax rate on the same category of income.
C) the withholding tax rate applied to various types of passive income. D) all of the options Answer:D Topic: Withholding Tax 7 32)Value-added tax (VAT) is 32)
A) an indirect national tax levied on the value added in the production of a good (or
service) as it moves through various stages of production.
B)a direct national tax levied on the value added in the production of a good (or
service) as it moves through various stages of production.
C) the equivalent of imposing a national sales tax.
D) an indirect national tax levied on the value added in the production of a good (or
service) as it moves through various stages of production, and is also the equivalent
of imposing a national sales tax. Answer:D Topic: Value- Added Tax
33)Assume that a product has the following three stages of production: 33) Production Stage Selling Price 1 € 600 2 € 1,400 3 € 1,700
If the value-added tax (VAT) rate is 15 percent, what is the incremental VAT at Stage 2 of production? A) €75 B)€120 C) €255 D) €210 Answer:B Topic: Value- Added Tax
34)Assume that a product has the following three stages of production: 34) Production Stage Selling Price 1 € 600 2 € 1,400 3 € 1,700
If the value-added tax (VAT) rate is 15 percent, what would be the VAT over all stages of production? A) €255 B)€90 C) €120 D) €465 Answer:A Topic: Value- Added Tax 8
35)Assume that a product has the following three stages of production: 35) Production Stage Selling Price 1 € 100 2 € 250 3 € 1,500
If the value-added tax (VAT) rate is 15 percent, what would be the VAT over all stages of production? A) €90 B)€225 C) €120 D) €465 Answer:B Topic: Value- Added Tax
36)Assume that a product has the following three stages of production: 36) Production Stage Selling Price 1 € 100 2 € 250 3 € 750
If the value-added tax (VAT) rate is 20 percent, what would be the VAT over all stages of production? A) €120 B)€225 C) €150 D) €110 Answer:C Topic: Value- Added Tax
37)Assume that a product has the following three stages of production: 37) Production Stage Selling Price 1 € 80 2 € 160 3 € 320
If the value-added tax (VAT) rate is 20 percent, what would be the VAT over all stages of production? A) €465 B)€64 C) €120 D) €225 Answer:B Topic: Value- Added Tax 9
38)Assume that a product has the following three stages of production: 38) Production Stage Selling Price 1 € 10 2 € 250 3 € 1,500
If the value-added tax (VAT) rate is 20 percent, what would be the VAT over all stages of production? A) €90 B)€225 C) €300 D) €120 Answer:C Topic: Value- Added Tax
39)Assume that a product has the following three stages of production: 39) Production Stage Selling Price 1 € 100 2 € 250 3 € 750
If the value-added tax (VAT) rate is 25 percent, what would be the VAT over all stages of production? A) €150 B)€120 C) €187.50 D) €225 Answer:C Topic: Value- Added Tax
40)Assume that a product has the following three stages of production: 40) Production Stage Selling Price 1 € 80 2 € 160 3 € 360
If the value-added tax (VAT) rate is 10 percent, what would be the VAT over all stages of production? A) €465 B)€225 C) €36 D) €64 Answer:C Topic: Value- Added Tax 10
41)Assume that a product has the following three stages of production: 41) Production Stage Selling Price 1 € 1,000 2 € 2,000 3 € 3,000
If the value-added tax (VAT) rate is 15 percent, what would be the VAT over all stages of production? A) €450 B)€225 C) €120 D) €390 Answer:A Topic: Value- Added Tax
42)Assume that a product has the following three stages of production: 42) Production Stage Selling Price 1 € 1,000 2 € 2,000 3 € 3,000
If the value-added tax (VAT) rate is 20 percent, what would be the VAT over all stages of production? A) €350 B)€225 C) €600 D) €150 Answer:C Topic: Value- Added Tax
43)Assume that a product has the following three stages of production: 43) Production Stage Selling Price 1 € 800 2 € 960 3 € 15,000
If the value-added tax (VAT) rate is 20 percent, what would be the VAT over all stages of production? A) €120 B)€3,000 C) €2,808 D) €64 Answer:B Topic: Value- Added Tax
44)A value-added tax (VAT) is ________ national tax levied on the value added in the 44)
production of a good (or service) as it moves through the various stages of production. A) a sales tax B)a direct C) an indirect D) none of the options Answer:C Topic: Value- Added Tax 11
45)Tax evasion is more difficult under a VAT because 45)
A) customers can't convince retailers to sell things without a receipt.
B)at each stage in the production process producers have an incentive to obtain
documentation from the previous stage that the VAT was paid in order to get the greatest tax credit possible.
C) the cost of record keeping under a VAT system imposes an economic hardship on small businesses. D) none of the options Answer:B Topic: Value- Added Tax
46)Which of the following are true? 46)
A) An income tax is a disincentive to save because the returns from savings are taxed.
B)National tax authorities find that a VAT is easier to collect than an income tax
because tax evasion is more difficult.
C) A VAT fosters national saving.
D) All of the options are true. Answer:D Topic: Value- Added Tax
47)Many economists prefer a VAT to an income tax because 47)
A) an income tax provides a disincentive to work, whereas a VAT is a disincentive to unnecessary consumption.
B)an income tax is an incentive to work, whereas a VAT is a disincentive to consumption.
C) these economists are pin heads with no real world experience. D) all of the options Answer:A Topic: Value- Added Tax
48)In a growing economy, the VAT would raise prodigious amounts of money 48)
A) in a way almost invisible to tax-paying voters.
B)but would discourage savings.
C) in a way obvious to tax-paying voters. D) none of the options Answer:A
Topic: International Finance in Practice: The TAXING Devil You Know
49)Fundamentally, there are two types of tax jurisdiction. 49)
A) The residential and the visiting
B)The worldwide and the territorial
C) The earned and the unearned
D) The passive and the active income Answer:B
Topic: National Tax Environments 12
50)The worldwide method of declaring a national tax jurisdiction 50)
A) is to tax national residents of the country on their domestic income but not foreign-earned income.
B)is to tax national residents of the country on their worldwide income no matter in which country it is earned.
C) is to tax all income earned within the country by any taxpayer, domestic or foreign. D) none of the options Answer:B Topic: Worldwide Taxation
51)The worldwide method of declaring a national tax jurisdiction 51)
A) is to tax national residents of the country on their worldwide income no matter in which country it is earned.
B)is also known as the residential method.
C) is different from the territorial method of declaring a national tax jurisdiction. D) all of the options Answer:B Topic: Territorial Taxation
52)The territorial method of declaring a national tax jurisdiction is to 52)
A) tax all income earned within the country by any taxpayer, domestic or foreign.
B)also known as the residential method.
C) tax national residents of the country on their worldwide income no matter in which country it is earned. D) none of the options Answer:A Topic: Territorial Taxation
53)Affiliates of foreign MNCs are taxed on the income earned in the source country under 53)
A) the territorial method of declaring a national tax jurisdiction.
B)the source method of declaring a tax jurisdiction. C) all of the options D) none of the options Answer:C Topic: Territorial Taxation 13
54)Under the territorial method of declaring a national tax jurisdiction 54)
A) tax is levied on all income earned within the country by any taxpayer, domestic or foreign.
B)tax is levied on foreign residents of the country on their home-country income but not foreign-earned income.
C) the possibility of double taxation exists if the parent county of a foreign affiliate
also levies a tax on worldwide income. D) none of the options Answer:C Topic: Territorial Taxation
55)The typical approach to avoiding double taxation is 55)
A) for a nation to grant the parent firm credit against its domestic tax liability for taxes
paid to foreign tax authorities on foreign-source income.
B)for a company to use both worldwide and the territorial methods.
C) for a nation not to tax foreign-source income of its national residents. D) none of the options Answer:C Topic: Foreign Tax Credits
56)The foreign tax credit method followed by the United States is 56)
A) to grant the parent firm credit against its U.S. tax liability for taxes paid to foreign
tax authorities on foreign-source income, and is in place for the purpose of avoiding double taxation.
B)in place for the purpose of avoiding double taxation.
C) to grant the parent firm credit against its U.S. tax liability for taxes paid to foreign
tax authorities on foreign-source income. D) none of the options Answer:A Topic: Foreign Tax Credits
57)A direct foreign tax credit is 57)
A) computed for direct taxes paid on active foreign-source income of a foreign branch of a U.S. MNC.
B)computed on the indirect withholding taxes withheld form passive income
distributed by the foreign subsidiary to the U.S. parent.
C) computed for direct taxes paid on active foreign-source income of a foreign branch
of a U.S. MNC, and is also computed on the indirect withholding taxes withheld
form passive income distributed by the foreign subsidiary to the U.S. parent.
D) computed for income taxes deemed paid by the subsidiary. Answer:C Topic: Foreign Tax Credits 14
58)In a given year, the U.S. IRS places an overall limitation applied to foreign tax credits. 58)
A) The overall limitation is limited to the amount of tax due on the foreign-source income.
B)The overall limitation is limited to the amount of tax that would have been due on
the foreign-source income if it had been earned in the United States.
C) The overall limitation is limited to the amount of tax actually paid during the tax
year on the foreign-source income. D) none of the options Answer:B Topic: Foreign Tax Credits
59)In a given year, the U.S. IRS places an overall limitation applied to foreign tax credits. 59)
A) the maximum tax credit is figured on foreign-source income in each country; losses
in one country cannot offset profits in another.
B)the maximum tax credit is figured on world-wide foreign-source income; losses in
one country can offset profits in another.
C) the overall limitation is limited to the amount of tax that would be due on the
foreign-source income if it had been earned in the United States.
D) the maximum tax credit is figured on world-wide foreign-source income; losses in
one country can offset profits in another, and the overall limitation is limited to the
amount of tax that would be due on the foreign-source income if it had been earned in the United States. Answer:D Topic: Foreign Tax Credits
60)In a given year, the U.S. IRS places an overall limitation applied to foreign tax credits. 60)
A) The maximum tax credit is figured on world-wide foreign-source income; losses in
one country can offset profits in another.
B)The overall limitation is limited to the amount of tax that would be due on the
foreign-source income if it had been earned in the United States.
C) Value-added taxes paid cannot be included in determining the amount of the foreign tax credit. D) all of the options Answer:D Topic: Foreign Tax Credits
61)Countries differ in how they tax foreign-source income of their domestic MNCs. 61)
A) However, due to tax treaties and foreign tax credits, this is not an issue for a U.S.-based MNC.
B)But all countries tax domestic income of their domestic MNCs in the same way.
C) Therefore, different forms of structuring a multinational organization within a
country can result in different tax liabilities for the firm. D) all of the options Answer:C
Topic: Organizational Structures for Reducing Tax Liabilities 15 62)A foreign branch is 62)
A) an extension of the parent and is not an independently incorporated firm separate from the parent.
B)an affiliate organization of the MNC that is independently incorporated in the
foreign country, and one in which the U.S. MNC owns at least 10 percent of the
voting equity stock. In addition, a foreign branch is either a minority foreign
subsidiary (an uncontrolled foreign corporation) or a controlled foreign corporation.
C) either a minority foreign subsidiary (an uncontrolled foreign corporation) or a
controlled foreign corporation.
D) an affiliate organization of the MNC that is independently incorporated in the
foreign country, and one in which the U.S. MNC owns at least 10 percent of the voting equity stock. Answer:A
Topic: Branch and Subsidiary Income 63)A foreign subsidiary is 63)
A) an extension of the parent and is not an independently incorporated firm separate from the parent.
B)either a minority foreign subsidiary (an uncontrolled foreign corporation) or a
controlled foreign corporation.
C) an affiliate organization of the MNC that is independently incorporated in the
foreign country, and one in which the U.S. MNC owns at least 10 percent of the voting equity stock.
D) an affiliate organization of the MNC that is independently incorporated in the
foreign country, and one in which the U.S. MNC owns at least 10 percent of the
voting equity stock. In addition, a foreign subsidiary is either a minority foreign
subsidiary (an uncontrolled foreign corporation) or a controlled foreign corporation. Answer:D
Topic: Branch and Subsidiary Income 16
64)An uncontrolled foreign corporation is 64)
A) an affiliate organization of the MNC that is independently incorporated in the
foreign country, and one in which the U.S. MNC owns at least 51 percent of the voting equity stock.
B)an extension of the parent and is not an independently incorporated firm separate from the parent.
C) an affiliate organization of the MNC that is independently incorporated in the
foreign country, and one in which the U.S. MNC owns at least 10 percent but less
than 50 percent of the voting equity stock.
D) an affiliate organization of the MNC that is independently incorporated in the
foreign country, and one in which the U.S. MNC owns at least 51 percent of the
voting equity stock. In addition, an uncontrolled foreign corporation is an affiliate
organization of the MNC that is independently incorporated in the foreign country,
and one in which the U.S. MNC owns at least 10 percent but less than 50 percent of the voting equity stock. Answer:C
Topic: Branch and Subsidiary Income 65)As a general rule, 65)
A) excess tax credits can be carried forward five years.
B)excess tax credits can be carried back two years.
C) excess tax credits must be used in the year recognized.
D) excess tax credits can be carried back two years and can be carried forward five years. Answer:D
Topic: Branch and Subsidiary Income
66)An overseas affiliate of a U.S. MNC can be organized 66)
A) as a branch, as well as a subsidiary. B)as a branch. C) as a subsidiary. D) none of the options Answer:A
Topic: Branch and Subsidiary Income
67)When excess tax credits go unused, the foreign tax liability for a branch is greater than the 67)
corresponding U.S. tax liability when the foreign income tax rate is greater than the U.S. rate.
Calculate the total tax liability for a wholly-owned subsidiary when excess tax credits cannot be used in a country given: U.S. tax rate = 35 percent Foreign tax rate = 39 percent
Withholding tax rate = 5 percent A) 44.00 percent B)43.36 percent C) 42.05 percent D) 35.00 percent Answer:C
Topic: Branch and Subsidiary Income 17
68)When excess tax credits go unused, the foreign tax liability for a branch is greater than the 68)
corresponding U.S. tax liability when the foreign income tax rate is greater than the U.S. rate.
Calculate the total tax liability for a wholly-owned subsidiary when excess tax credits cannot be used in a country given: 35% U.S. tax rate 41% Foreign tax rate 4% Withholding tax rate A) 35.00 percent B)37.00 percent C) 42.05 percent D) 43.36 percent Answer:D
Topic: Branch and Subsidiary Income
69)As a rule, payments to and from foreign affiliates 69)
A) involve accounting values assigned to goods or services exchanged between foreign affiliates.
B)involve tax credits trading between affiliates.
C) involve the issue of transfer pricing, as well as accounting values assigned to goods
or services exchanged between foreign affiliates.
D) involve the issue of transfer pricing. Answer:C
Topic: Payments to and from Foreign Affiliates 70)A transfer price 70)
A) is the price that one division of a firm charges to another division of a firm.
B)does not involve actual cash flows, therefore does not impact the share price.
C) is an accounting issue, not a finance issue. D) none of the options Answer:A
Topic: Payments to and from Foreign Affiliates
71)Suppose a U.S.-based MNC makes bicycles with parts from its subsidiary in a low-tax 71)
East Asian country. The bicycle frames are made here, the component parts (cranksets,
wheels, and so on) are made abroad, and the bicycles are assembled in Japan and
reimported to the U.S. It can reduce its reported U.S. income—and increase its subsidiary's profits—by
A) undercharging its subsidiaries for the U.S.-made frames.
B)overcharging its subsidiaries for the U.S.-made frames.
C) assembling the bicycles in the U.S. D) none of the options Answer:A
Topic: Payments to and from Foreign Affiliates 18
72)The higher the transfer price 72)
A) the higher the gross profit of the transferring division relative to the receiving division.
B)the higher the gross profit of the receiving division relative to the transferring division.
C) the higher the net profit reported by the MNC. D) none of the options Answer:A
Topic: Payments to and from Foreign Affiliates
73)Affiliate A sells a million units to Affiliate B per year. The marginal income tax rate for 73)
Affiliate A is 20 percent and the marginal income tax rate for Affiliate B is 50 percent.
The transfer price can be set at any level between $100 and $200. Which transfer price
between A and B should the parent select? A) $150 B)$200 C) $100 D) none of the options Answer:B
Topic: Payments to and from Foreign Affiliates
74)The U.S. IRS allows transfer prices to be set using the arms-length price. 74)
A) This method is difficult to apply in practice because many factors enter into the
pricing of goods and services. Examples include: differences in the terms of sale,
differences in quantity and or quality sold, even differences in location or date of sale.
B)This is a very straight-forward method to use in practice—just use the eBay price. C) all of the options D) none of the options Answer:A
Topic: Payments to and from Foreign Affiliates
75)The lower the transfer price, 75)
A) the lower the gross profit of the transferring division relative to the receiving division.
B)the higher the net profit reported by the MNC.
C) the higher the gross profit of the receiving division relative to the transferring division. D) none of the options Answer:A
Topic: Payments to and from Foreign Affiliates 19
76)A "tax haven" country is one that has a low, or zero percent, national tax rates. Some of 76)
the countries that fall into this category are
A) Congo, Egypt, Kuwait, and Zaire.
B)Bahamas, Bahrain, Bermuda, and the Cayman Islands.
C) Denmark, Norway, Switzerland, and Sweden.
D) Bulgaria, Canada, Saudi Arabia, and South Africa. Answer:B Topic: Tax Havens
77)These days the benefits of "tax haven" subsidiaries have been reduced by 77)
A) the present corporate income tax rate in the United States is not especially high in
comparison to most non-tax haven countries.
B)the rules governing controlled foreign corporations have effectively eliminated the
ability to defer passive income in a tax haven subsidiary. C) all of the options D) none of the options Answer:C Topic: Tax Havens
78)A controlled foreign corporation (CFC) is 78)
A) a foreign corporation established as an affiliate of a U.S. corporation for the purpose
of "buying" from the U.S. corporation property for resale and use abroad.
B)a foreign subsidiary that has more than 50 percent of its voting equity owned by U.S. shareholders.
C) one that has no "overall limitation" in regards to its foreign tax credits.
D) a separate domestic U.S. corporation actively engaged in business in a U.S.
possession (Puerto Rico and the U.S. Virgin Islands). Answer:B
Topic: Controlled Foreign Corporation
79)The undistributed income of a minority foreign subsidiary of a U.S. MNC 79)
A) is withheld under subpart U.S. income restrictions.
B)is tax deferred until it is remitted via a dividend.
C) is taxed as imputed income. D) none of the options Answer:B
Topic: Controlled Foreign Corporation 20