Chapter 14 Multinational Tax Management Multiple Choice and True/False Questions 14.1 Tax Principles

Fundamentals of Multinational Finance, 4e (Moffett)
Chapter 14 Multinational Tax Management
Multiple Choice and True/False Questions
14.1 Tax Principles
1) The primary objective of multinational tax planning is to minimize the firm's worldwide tax burden.
Answer: TRUE
Diff: 1
Topic: 14.1 Tax Principles
Skill: Recognition
2) 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.
Answer: B
Diff: 1
Skill: Conceptual
3) 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.
Answer: D
Diff: 1
Skill: Recognition
4) 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
Answer: C
Diff: 1
Skill: Conceptual
1
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5) 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.
Answer: D
Diff: 1
Skill: Conceptual
6) General Motors operates in many different countries and pays taxes at many different rates. However,
they always pay the same rate as their local competitors. General Motors is operating in an environment
of ________ tax policy.
A) domestic neutrality
B) foreign neutrality
C) territorial approach
Answer: B
Diff: 1
Skill: Recognition
7) 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 ________ approach to levying taxes.
A) worldwide
B) territorial
C) neutral
D) equitable
Answer: A
Diff: 1
Skill: Recognition
8) 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
Answer: C
Diff: 1
Skill: Conceptual
2
9) A country CANNOT have both a territorial and a worldwide approach as a national tax policy.
Answer: FALSE
Diff: 1
Skill: Conceptual
10) Jensen Optimetrics 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, Jensen should pay taxes at a rate of
________.
A) 75%
B) 62.5%
C) 0%
D) 50%
Answer: C
Diff: 2
Skill: Analytical
11) The territorial approach to taxation policy is also termed the ________ approach.
A) source
B) ethical
C) greedy
D) location
Answer: A
Diff: 1
Skill: Recognition
12) Tax treaties generally have the effect of increasing the withholding taxes between the countries that
are negotiating the treaties.
Answer: FALSE
Diff: 1
Skill: Conceptual
13) ________ taxes are applied to income and ________ taxes are applied to some other measurable
performance characteristic of the firm.
A) Income; direct
B) Indirect; income
C) Indirect; direct
D) Direct; indirect
Answer: D
Diff: 1
Skill: Recognition
3
14) Depending on the host country, corporate income taxes worldwide may be as low as ________.
A) 0%
B) 5%
C) 10%
D) 15%
Answer: A
Diff: 1
Skill: Recognition
15) The basic idea behind withholding taxes for foreign investors is
A) to receive taxes on passively earned income.
B) a recognition that most foreign investors are unlikely to file taxes in the host country.
C) to ensure that income earned is taxed by the host country.
D) all of the above.
Answer: D
Diff: 1
Skill: Conceptual
16) A value-added tax has gained widespread use in Western Europe, Canada, and parts of Latin
America.
Answer: TRUE
Diff: 1
Skill: Recognition
17) 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
Answer: C
Diff: 1
Skill: Recognition
18) 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
Answer: D
Diff: 2
Skill: Analytical
4
19) A tax that is a form of social redistribution of income is defined as a/an ________ tax.
A) un-American
B) transfer
C) flat
Answer: B
Diff: 1
Skill: Recognition
20) 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
Answer: C
Diff: 1
Skill: Recognition
21) Tax credits are less valuable on a dollar-for-dollar basis than are tax-deductible expenses.
Answer: FALSE
Diff: 1
Skill: Conceptual
Instruction 14.1:
Use the information to answer the following question(s).
Rogue River 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%.
22) Refer to Instruction 14.1. If the U.S. has no bilateral trade agreement with the host country, what is
the total amount of income taxes Rogue River Exporters will pay?
A) $25,000
B) $35,000
C) $51,250
D) $60,000
Answer: C
Diff: 2
Skill: Analytical
5
23) Refer to Instruction 14.1. 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 Rogue River 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
Answer: A
Diff: 2
Skill: Analytical
24) Refer to Instruction 14.1. If the U.S. treated the taxes paid on income earned in the host country as a
tax-deductible expense, then Rogue River's total U.S. corporate tax on the foreign earnings would be
________.
A) $10,000
B) $26,250
C) $35,000
D) $51,250
Answer: B
Diff: 2
Skill: Analytical
25) Refer to Instruction 14.1. If the U.S. treated the taxes paid on income earned in the host country as a
tax-credit, then Rogue River's total U.S. corporate tax on the foreign earnings would be ________.
A) $51,250
B) $35,000
C) $26,250
D) $10,000
Answer: D
Diff: 2
Skill: Analytical
26) Which of the following factors is NOT important for U.S. corporations for determining the amount
of foreign tax credit allowed for direct taxes paid on income in a foreign country?
A) the Foreign corporate income tax rate
B) the U.S. corporate income tax rate
C) the foreign corporate dividend withholding tax rate
D) All of the above are important factors.
Answer: D
Diff: 1
Skill: Recognition
6
27) 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
Answer: D
Diff: 1
Skill: Recognition
28) The value-added tax is

A) similar to an ad valorem tax on imports.
B) a form of direct taxation on corporate income.
C) a form of national sales tax.
Answer: C
Diff: 1
Skill: Recognition
29) Domestic tax neutrality means that

A) a dollar earned anywhere in the world by a U.S. corporation is taxed the same as if earned in the U.S.
B) tax rates are neither regressive nor progressive.
C) foreign affiliates must neutralize their income by subtraction of foreign investment credits.
Answer: A
Diff: 1
Skill: Conceptual
30) Some countries assess extremely low corporate income tax rates on foreign source income in order
to
A) attract tax haven affiliates of foreign multinationals.
B) boost the value of their domestic currency.
C) support higher taxes of their domestic companies.
Answer: A
Diff: 1
Skill: Conceptual
31) Developing foreign markets can create shareholder value. Manipulating global tax payments does
not create shareholder value.
Answer: FALSE
Diff: 1
Skill: Conceptual
7
32) Poland has a corporate income tax rate that is higher than that in the United States by the amount of
40% in Poland and 35% in the U.S. This differential mean that a U.S. parent operating with a subsidiary
in Poland can realize an
A) excess profit on their Polish investment.
B) excess foreign tax deficit.
C) excess foreign tax credit.
Answer: C
Diff: 1
Skill: Recognition
33) Which of the following is NOT a disadvantage of the value-added tax?

A) The tax may have an inflationary impact.
B) It is a regressive tax.
C) It increases the total tax burden.
D) All are disadvantages.
Answer: D
Diff: 1
Skill: Conceptual
34) The purpose of a withholding tax on dividend income is to

A) raise the effective as rate of the local host country.
B) provide an incentive for MNEs to pay higher dividends to their parent companies.
C) obtain a minimum tax payment on the incomes of dividend income receipts.
D) encourage MNEs to reposition profits outside of their countries.
Answer: C
Diff: 1
Skill: Conceptual
35) The two basic approaches to national tax systems are

A) domestic and foreign.
B) worldwide and territorial.
C) high and low rates.
D) continental and global.
Answer: B
Diff: 1
Skill: Recognition
36) All indications are that the value-added tax will soon be the dominant form of taxation in the U.S.
Answer: FALSE
Diff: 1
Skill: Recognition
8
14.2 Transfer Pricing
TABLE 14.1
Uses the information to answer the following question(s).
MetroCity 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 14.1. If MetroCity 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
Answer: D
Diff: 2
Topic: 14.2 Transfer Pricing
Skill: Analytical
2) Refer to Table 14.1. 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.
Answer: A
Diff: 2
Skill: Analytical
3) Refer to Table 14.1. How much in additional U.S. taxes would be due if MetroCity 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
Answer: C
Diff: 2
Skill: Analytical
9
4) Refer to Table 14.1. If MetroCity set the payout rate from the Ukraine subsidiary at 25%, how should
MetroCity 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%
Answer: B
Diff: 2
Skill: Analytical
5) Refer to Table 14.1. What is the minimum effective tax rate that MetroCity can achieve on its
foreign-sourced income?
A) 26%
B) 35%
C) 40%
D) 0%
Answer: B
Diff: 2
Skill: Recognition
6) 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.
Answer: D
Diff: 1
Skill: Recognition
7) 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 proven innocent" tax approach.
Answer: TRUE
Diff: 1
Skill: Recognition
10
8) ________ is NOT an "arm's length price" method of determining transfer prices among parent and
affiliated firms.
A) Comparable uncontrolled price method
B) Resale price method
C) Cost-plus method
D) All of the above are acceptable methods.
Answer: D
Diff: 1
Skill: Recognition
9) Johnson Worldwide Aeronautics Inc., headquartered in the United States, is attempting to reduce the
firm's consolidated total income taxes. The firm has just made a sale of parts to their affiliate in
Lithuania, a country that has a corporate income tax rate of 15%. If the United States has a corporate
income tax rate of 35%, which of the following transfer pricing strategies should Johnson attempt to
follow?
A) Comparable parts were sold to a subsidiary in the United States for $1,000,000, therefore, Johnson
should price the parts for $1,000,000.
B) If Johnson made an individual stand-alone sale of these parts on the open market the estimated price
is $1,250,000. Therefore, this should be Johnson's price.
C) If Johnson were to allocate full costs including overhead and a reasonable profit on the sale, they
could charge a total of $1,500,000. Therefore this should be Johnson's price.
D) Johnson's price to its affiliate makes no difference; the consolidated income taxes will be the same
regardless of the transfer pricing technique used by the firm.
Answer: C
Diff: 2
Skill: Conceptual
10) A foreign subsidiary has $2,000,000 of taxable income, a (foreign) corporate tax rate of 25%, and a
foreign dividend withholding rate of 10%. The U.S. (domestic) parent has a corporate tax rate of 30%.
What are the total taxes paid by the foreign subsidiary? Assume that the foreign subsidiary is 100%
owned by the U.S. parent and that all after-tax income is paid to the U.S. parent.
A) $0.00
B) $650,000
C) $500,000
D) $1,350,000
Answer: B
Diff: 2
Skill: Analytical
11
11) A foreign subsidiary has $2,000,000 of taxable income, a (foreign) corporate tax rate of 25%, and a
foreign dividend withholding rate of 10%. The U.S. (domestic) parent has a corporate tax rate of 30%.
What are the additional taxes paid by the U.S. domestic parent after the foreign subsidiary pays
corporate and withholding taxes? Assume that the foreign subsidiary is 100% owned by the U.S. parent
and that all after-tax income is paid to the U.S. parent.
A) $0.00
B) $600,000
C) $405,000
D) $250,000
Answer: A
Diff: 2
Skill: Analytical
12) 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.
Answer: FALSE
Diff: 1
Skill: Recognition
13) 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.
Answer: FALSE
Diff: 1
Skill: Recognition
14) ________ is the pricing of goods, services, and technology between related companies.
A) Among pricing
B) Retail pricing
C) Transfer pricing
D) Wholesale pricing
Answer: C
Diff: 1
Skill: Recognition
12
14.3 Tax-Haven Subsidiaries and International Offshore Financial Centers
1) Tax-haven subsidiaries, categorically referred to as International Offshore Financial Centers, have the
following characteristics EXCEPT ________.
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) A stable currency to permit easy conversion of funds into and out of the local currency. This
requirement can be met by permitting and facilitating the use of Eurocurrencies.
C) A stable government that encourages the establishment of foreign-owned financial and service
facilities within its borders.
D) All of the above are tax-haven subsidiary characteristics.
Answer: D
Diff: 1
Topic: 14.3 Tax-Haven Subsidiaries and International Offshore Financial Centers
Skill: Recognition
2) The typical tax-haven subsidiary owns the common stock of its related operating foreign subsidiaries.
Answer: TRUE
Diff: 1
Skill: Conceptual
3) For U.S. MNEs, the tax-deferral privilege operating through a foreign subsidiary was not originally a
tax loophole. On the contrary, it was granted by the U.S. government to allow U.S. firms to expand
overseas and place them on a par with foreign competitors, that also enjoy similar types of tax deferral
and export subsidies of one type or another.
Answer: TRUE
Diff: 1
Skill: Recognition
13
Essay Questions
14.1 Tax Principles
1) 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.
Answer: The worldwide approach taxes the income of firms based on their place of residence rather
than on where the income was earned. Thus, a U.S. based MNE will owe U.S. taxes on income earned
in, say, Britain. The territorial approach to taxation taxes all of the income earned within the borders of
the country by both domestic and foreign-based firms. Thus, a British-based firm making sales in New
York will owe taxes in the U.S.
Through a series of bilateral tax agreements the U.S. and several trading partners have tried to workout
tax issues. Generally, the taxes a U.S. based MNE pays abroad will help offset any required taxes the
firm might have on funds remitted to the United States.
Diff: 3
2) 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?
Answer: A value-added tax (VAT) is a form of national sales tax, where goods are taxed at each step of
extraction, production, wholesale, and retail. A VAT tax is considered regressive because those with
lower incomes pay the same taxes on a particular commodity as those with more money. Americans
have never taken to this type of national tax because the most similar type of state and local tax is the
sales tax, and that has always been the domain of the states. Plus the fact that it is regressive make the
tax a tough sell to tax payers.
Diff: 3
14
14.2 Transfer Pricing
1) The pricing of goods, services, and technology transferred to a foreign subsidiary from an
affiliated company, transfer pricing, is the first and foremost method of transferring funds out
of a foreign subsidiary. When engaged in transfer pricing managers must consider at least two basic
factors; Fund Positioning Effect and the Income Tax Effect. Explain each of these effects.
Answer:
Fund Positioning Effect. A parent wishing to transfer funds out of a particular country can charge
higher prices on goods sold to its subsidiary in that country--to the degree that government regulations
allow.A foreign subsidiary can be financed by the reverse technique, a lowering of transfer prices.
Payment by the subsidiary for imports from its parent or sister subsidiary transfers funds out of the
subsidiary. A higher transfer price permits funds to be accumulated in the selling country. Transfer
pricing may also be used to transfer funds between sister subsidiaries. Multiple sourcing of component
parts on a worldwide basis allows switching between suppliers from within the corporate family to
function as a device to transfer funds.
Income Tax Effect. A major consideration in setting a transfer price is the income tax effect. Worldwide
corporate profits may be influenced by setting transfer prices to minimize taxable income in a country
with a high income tax rate and maximize income in a country with a low income tax rate. A parent
wishing to reduce the taxable profits of a subsidiary in a high-tax environment may set transfer prices at
a higher rate to increase the costs of the subsidiary thereby reducing taxable income.
Diff: 3
14.3 Tax-Haven Subsidiaries and International Offshore Financial Centers
1) Many MNEs have foreign subsidiaries that act as tax havens for corporate funds awaiting
reinvestment or repatriation. Tax-haven subsidiaries, categorically referred to as International Offshore
Financial Centers, are partially a result of tax-deferral features on earned foreign income allowed by
some of the parent countries. Tax-haven subsidiaries are typically established in a country that can meet
four basic requirements: List and define these requirements.
Answer: 1. 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.
2. A stable currency to permit easy conversion of funds into and out of the local currency. This
requirement can be met by permitting and facilitating the use of Eurocurrencies.
3. The facilities to support financial services; for example, good communications, professional
qualified office workers, and reputable banking services.
4. A stable government that encourages the establishment of foreign-owned financial and service
facilities within its borders.
Diff: 3
15

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Chapter 14 Multinational Tax Management Multiple Choice and True/False Questions 14.1 Tax Principles

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Fundamentals of Multinational Finance, 4e (Moffett)

Chapter 14 Multinational Tax Management

Multiple Choice and True/False Questions

14.1 Tax Principles

28) The value-added tax is

29) Domestic tax neutrality means that

33) Which of the following is NOT a disadvantage of the value-added tax?

34) The purpose of a withholding tax on dividend income is to

35) The two basic approaches to national tax systems are

6) Transfer pricing is a strategy that may be used by MNEs to

14.1 Tax Principles

14.3 Tax-Haven Subsidiaries and International Offshore Financial Centers

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