Student

21
Student: ___________________________________________________________________________
1.
An income tax is a direct tax.

True False
2.
The two main objectives of taxation are

A. tax neutrality and tax equity.
B. complexity and revenue.
C. social engineering and tax equity.
D. progressive taxation and tax neutrality.
3.
The three basic types of taxation are

A. income tax, withholding tax, and value-added tax.
B. income tax, withholding tax, and business tax.
C. withholding tax, value-added tax, and corporate tax.
D. personal tax, corporate tax, and operating tax.
4.
Tax neutrality is determined

A. by one criterion.
B. by two criteria.
C. by three criteria.
D. by four criteria.
5.
Tax neutrality is determined by three criteria: which of the following doesn't belong?
A. Capital-export neutrality
B. Capital-import neutrality
C. National neutrality
D. Income neutrality
6.
Tax neutrality
A. has its foundations in the principles of economic efficiency and equity.
B. can be a difficult principle to apply in practice.
C. is determined by three criteria: capital export neutrality, capital import neutrality and national
neutrality.
D. all of the above
7.
The idea that an ideal tax should be effective in raising revenue for the government but not have any
negative effects on the economic decision-making process of the taxpayer is referred to as
A. capital-export neutrality.
B. capital-import neutrality.
C. national neutrality.
D. none of the above
8.
The idea 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 is referred to as
9.
Capital export neutrality

A. is a goal based on worldwide economic efficiency.
B. is an example of Mercantilism.
C. is based on host country economic efficiency.
D. is based on MNC home country economic efficiency.
10. The idea that the tax burden a host country imposes on the foreign subsidiary of a MNC 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
C. National neutrality.
11. Capital export neutrality
Ais 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.
B 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.
Cimplies 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.
12. National neutrality
firms.
13. Capital import neutrality
firms.
14. The term "capital-import neutrality" refers to
Athe 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 fact that taxable income is taxed in the same manner by the taxpayer's national tax authority
Cthe criterion that the tax burden a host country imposes on the foreign subsidiary of a MNC should be
. the same regardless in which country the MNC is incorporated and the same as that placed on domestic
firms.
D underlying principle that all similarly situated taxpayers should participate in the cost of operating the
. government according to the same rules.
15. The criteria of tax neutrality: capital export neutrality, capital import neutrality and national neutrality
A. all consistent with one another.
B. are not always consistent with one another.
16. Implementing capital import neutrality means that

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 a MNC should be the same
. regardless of the country in which the MNC is incorporated.
C. the tax burden a host country imposes on the foreign subsidiary of a MNC should be the same as that
placed on domestic firms.
D. all of the above
17. Tax equity means that
A. similarly situated taxpayers should participate in the cost of operating the government according to the
same rules.
B. regardless of the country in which an affiliate of a MNC earns taxable income, the same tax rate and
tax due date apply.
C. a dollar earned by a foreign affiliate is taxed under the same rules as a dollar earned by a domestic
affiliate of the MNC.
D. all of the above
18. The underlying principle of tax equity is that
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 above
19. If a dollar earned by a foreign affiliate is taxed under the same rules as a dollar earned by a domestic
affiliate of the MNC, then we have achieved
D. tax equity.
20. The organizational form of a MNC can affect the timing of a tax liability. This means
A. the principle of tax equity might be violated.
B as long as regardless of the country in which an affiliate of a MNC earns taxable income, the same tax
. rates apply, then the tax due date doesn't matter.
C. tax timing will even out over a reporting cycle, so there is no big deal here.
21. There are three basic types of taxation that national governments throughout the world use:
B. property tax, wealth tax, and death tax.
C. import quotas, duties, and tariffs.
D. tariffs, ad valorem taxes, and income taxes.
22. An income tax is defined by your textbook as
A. is a direct tax.
B. is an indirect tax.
C. is collected with a withholding tax.
23. Which statement is false?

A Active income is defined as income that results from production by the firm or individual or from
. services that have been provided.
B. Passive income includes dividends and interest income, and income from royalties, patents, or
copyrights paid to the taxpayer.
C 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.
D The current marginal U.S. income tax rate is positioned towards the lower end of the rates assessed by
. the majority of other countries.
24. The current marginal U.S. income tax rate is positioned
A. pretty well in the middle of the rates assessed by the majority of other countries.
B. towards the upper end of the rates assessed by the majority of other countries.
C. towards the lower end of the rates assessed by the majority of other countries.
25. A withholding tax is defined by your textbook as
A. the money that the government takes for every worker's paycheck.
B. social security taxes.
C. a tax levied on income earned by an individual (or corporation) of one country within the tax
jurisdiction of another county.
D a tax levied on passive income earned by an individual (or corporation) of one country within the tax
. jurisdiction of another county.
26. The purpose of a withholding tax
A. is to assure the local tax authority that it will receive the tax due on the active 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 all income earned within its tax
jurisdiction.
27. A withholding tax is
A. an indirect tax.
B. a direct tax.
28. Withholding tax rates imposed through tax treaties are
A. bilateral.
B. multilateral.
C. netted.
29. The United States withholds ___ of passive income from taxpayers that reside in countries with which it
does not have withholding tax treaties.
A. 10%
B. 20%
C. 30%
D. 40%
E. 50%
30. A withholding tax
A. is borne by a taxpayer who did not directly generate the income that serves as the source of the passive
income.
B. a direct tax on workers.
C. assures the local tax authority that it will receive the tax due on the passive income earned within its
tax jurisdiction.
D. both a and c
31. Many countries have tax treaties with one another. These generally specify
A. the withholding tax rate applied to various types of passive income.
B. that withholding tax rates imposed through tax treaties are bilateral.
C. the two countries agree to impose the same tax rate on the same category of income.
D. all of the above
32. Value-added tax (VAT) is
A 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.
B an indirect national tax levied on the value added in the production of a good (or service) as it moves
C. the equivalent of imposing a national sales tax.
D. both b and c
33. Assume that a product has the following three stages of production:
If the value-added tax (VAT) rate is 15%, what is the incremental VAT at Stage 2 of production?
A. 75
B. 120
C. 210
D. 255
If the value-added tax (VAT) rate is 15%, what would be the VAT over all stages of production?
A. 90
B. 120
C. 465
D. 255
A. 90
B. 120
C. 465
D. 225
A. 110
B. 120
C. 150
D. 225
A. 64
B. 120
C. 465
D. 225
A. 90
B. 120
C. 300
D. 225
A. 187.50
B. 120
C. 150
D. 225
A. 64
B. 36
C. 465
D. 225
A. 390
B. 120
C. 465
D. 225
A. 150
B. 600
C. 350
D. 225
A. 64
B. 120
C. 2,808
D. 3,000
44. A value-added tax (VAT) is __________ national tax levied on the value added in the production of a
good (or service) as it moves through the various stages of production.
A. a direct
B. an indirect
C. a sales tax
45. Tax evasion is more difficult under a VAT because

Aat 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.
B. customers can't convince retailers to sell things without a receipt.
C. the cost of record keeping under a VAT system imposes an economic hardship on small businesses.
46. Which of the following are true?
A. A VAT fosters national saving.
B. An income tax is a disincentive to save because the returns from savings are taxed.
C. National tax authorities find that a VAT is easier to collect than an income tax because tax evasion is
more difficult.
D. All of the above are true
47. Many economists prefer a VAT to an income tax because
A. these economists are pin heads with no real world experience.
B. an income tax provides a disincentive to work, whereas a VAT is a disincentive to unnecessary
consumption.
C. an income tax is an incentive to work, whereas a VAT is a disincentive to consumption.
D. all of the above
48. In a growing economy, the VAT would raise prodigious amounts of money
A. in a way almost invisible to tax-paying voters.
B. in a way obvious to tax-paying voters.
C. but would discourage savings.
49. Fundamentally, there are two types of tax jurisdiction:
A. The worldwide and the territorial.
B. The residential and the visiting.
C. The passive and the active income.
D. The earned and the unearned.
50. The worldwide method of declaring a national tax jurisdiction
A. is to tax national residents of the country on their worldwide income no matter in which country it is
earned.
B. is to tax all income earned within the country by any taxpayer, domestic or foreign.
C. is to tax national residents of the country on their domestic income but not foreign-earned income.
51. The worldwide or residential method of declaring a national tax jurisdiction is to
A. tax national residents of the country on their worldwide income no matter in which country it is
earned.
B. tax all income earned within the country by any taxpayer, domestic or foreign.
C. tax foreign residents of the country on their home-country income but not foreign-earned income.
52. The worldwide method of declaring a national tax jurisdiction
A. is also known as the residential method.
B. is to tax national residents of the country on their worldwide income no matter in which country it is
earned.
C. is different from the territorial method of declaring a national tax jurisdiction.
D. all of the above
53. The territorial method of declaring a national tax jurisdiction is to

A. tax all income earned within the country by any taxpayer, domestic or foreign.
B. tax national residents of the country on their worldwide income no matter in which country it is
earned.
C. also known as the residential method.
54. The territorial method of declaring a national tax jurisdiction
A. is to tax national residents of the country on their worldwide income no matter in which country it is
earned.
C. is to tax foreign residents of the country on their home-country income but not foreign-earned income.
55. Affiliates of foreign MNCs are taxed on the income earned in the source country under
A. the territorial method of declaring a national tax jurisdiction.
B. the source method of declaring a tax jurisdiction.
C. all of the above
56. Under the territorial method of declaring a national tax jurisdiction
A. the possibility of double taxation exists if the parent county of a foreign affiliate also levies a tax on
worldwide income.
B. tax is levied on all income earned within the country by any taxpayer, domestic or foreign.
C. tax is levied on foreign residents of the country on their home-country income but not foreign-earned
income.
57. The typical approach to avoiding double taxation is
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 nation not to tax foreign-source income of its national residents.
C. for a company to use both worldwide and the territorial methods.
58. The foreign tax credit method followed by the United States is
A. to grant the parent firm credit against its U.S. tax liability for taxes paid to foreign tax authorities on
foreign-source income.
B. in place for the purpose of avoiding double taxation.
C. both a and b
59. A direct foreign tax credit is
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 income taxes deemed paid by the subsidiary.
D. both a and b
60. In a given year, the U.S. IRS places an overall limitation applied to foreign tax credits.
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 actually paid during the tax year on the foreignsource income.
C 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.
D. None of the above
A. the maximum tax credit is figured on world-wide foreign-source income; losses in one country can
offset profits in another.
B.the maximum tax credit is figured on foreign-source income in each country; losses in one country
cannot 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. both a and c
A. The maximum tax credit is figured on world-wide foreign-source income; losses in one country can
B. Value-added taxes paid cannot be included in determining the amount of the foreign tax credit.
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. All of the above
63. Countries differ in how they tax foreign-source income of their domestic MNCs.
A Therefore, different forms of structuring a multinational organization within a country can result in
. different tax liabilities for the firm.
B. However, due to tax treaties and foreign tax credits, this is not an issue for a U.S.-based MNC.
C. But all countries tax domestic income of their domestic MNCs in the same way.
D. All of the above
64. A foreign branch is
A. an extension of the parent and is not an independently incorporated firm separate from the parent.
Ban 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.
C. either a minority foreign subsidiary (an uncontrolled foreign corporation) or a controlled foreign
corporation.
D. both b and c
65. A foreign subsidiary is
corporation.
D. both b and c
66. An uncontrolled foreign corporation is
Can 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. b and c
67. As a general rule,
A. excess tax credits can be carried back two years.
B. excess tax credits can be carried forward five years.
C. excess tax credits must be used in the year recognized.
D. both a and b
68. An overseas affiliate of a U.S. MNC can be organized
A. as a branch.
B. as a subsidiary.
C. both a and b
69. When excess tax credits go unused, the foreign tax liability for a branch is greater than the 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%
Foreign tax rate = 39%
Withholding tax rate = 5%
A. 44.00%
B. 35.00%
C. 43.36%
D. 42.05%
70. When excess tax credits go unused, the foreign tax liability for a branch is greater than the 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:
A.
B.
C.
D.
35.00%
37.00%
43.36%
42.05%
71. As a rule, payments to and from foreign affiliates,

A. involve the issue of transfer pricing.
B. involve accounting values assigned to goods or services exchanged between foreign affiliates.
C. involve tax credits trading between affiliates.
D. both a and b
72. A transfer price
A. is the price that one division of a firm charges to another division of a firm.
B. is an accounting issue, not a finance issue.
C. does not involve actual cash flows, therefore does not impact the share price.
73. Suppose a U.S.-based MNC makes bicycles with parts from its subsidiary in a low-tax East Asian
country. The bicycle frames are made here, the component parts (cranksets, wheels, and so on) are made
abroad, the bicycles are assembled in Japan and reimported to the U.S. It can reduce its reported U.S.
incomeand increase its subsidiary's profitsby
A. overcharging its subsidiaries for the U.S.-made frames.
B. undercharging its subsidiaries for the U.S.-made frames.
C. assembling the bicycles in the U.S.
74. The higher the transfer price
A. the higher the net profit reported by the MNC.
B. the higher the gross profit of the receiving division relative to the transferring division.
C. the higher the gross profit of the transferring division relative to the receiving division.
75. Affiliate A sells a million units to Affiliate B per year. The marginal income tax rate for 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. $200
B. $100
C. $150
D. It does not matter.
76. The U.S. IRS allows transfer prices to be set using the arms-length price.
A. This is a very straight-forward method to use in practicejust use the eBay price.
BThis 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.
C. All of the above
77. The lower the transfer price
B. the lower the gross profit of the transferring division relative to the receiving division.
C. the higher the gross profit of the receiving division relative to the transferring division.
78. A "tax haven" country is one that has a low, or zero percent, national tax rates. Some of the countries that
fall into this category are
A. Bahamas, Bahrain, Bermuda, and the Cayman Islands.
B. Denmark, Norway, Switzerland, and Sweden.
C. Bulgaria, Canada, Saudi Arabia, and South Africa.
D. Congo, Egypt, Kuwait, and Zaire.
79. These days the benefits of "tax haven" subsidiaries have been reduced by
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 above
80. A controlled foreign corporation (CFC) is
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.a separate domestic U.S. corporation actively engaged in business in a U.S. possession (Puerto Rico
and the U.S. Virgin Islands).
D. one that has no "overall limitation" as regards to its foreign tax credits.
81. The undistributed income of a minority foreign subsidiary of a U.S. MNC
A. is tax deferred until it is remitted via a dividend.
B. is taxed as imputed income.
C. is withheld under subpart U.S. income restrictions.
82. There are three production stages required before a bicycle produced by Masi Bicicletia S.A. can be sold
at retail for 4,500. The VAT rate is 15%. Find the total tax liability due.
A. 525
B. 675
C. 3,500
83. There are three production stages required before a bicycle produced by Masi Bicicletia S.A. can be sold
at retail for 3,500. The VAT rate is 15%. Find the total tax liability due.
A. 525
B. 150
C. 3,500
84. If U.S. taxing authorities did not limit the amount of the foreign tax credit to the equivalent amount of the
U.S. tax
A. payers would arguably subsidize part of the tax liabilities of U.S. MNC's foreign earned income.
B. national neutrality would suffer.
C. MNCs would all depart our shores.
D. all of the above
85. Active income
A. that results from production by the firm or individual (of goods or services).
B. is income earned by professional athletes.
C. includes dividend and interest income, since the tax court has ruled that taking risk is a form of work.
D. none of the above.
86. The current U.S. marginal tax rate for domestic nonfinancial corporations is 35 percent.
AThis is positioned pretty well in the middle of the rates assessed by the majority of countries, as
. reported in the PriceWaterhouseCoopers annual Corporate Taxes: Worldwide summaries.
B. Is positioned toward the upper end of the rates assessed by the majority of countries.
C But this is reduced on a dollar-for-dollar basis for any and all taxes paid to foreign governments, so this
. is an upper limit for the tax rate faced by U.S. MNCs.
D. All of the above
87. Transfer pricing can have an effect on how divisions of a MNC are perceived by the local banks. Which
transfer price would leave a local affiliate that imports components from the parent with less impressive
financial statements?
A. High transfer price
B. Low transfer price
C. None of the above
88. For a parent that sells goods to a subsidiary, transfer pricing can have an effect on international capital
expenditure analysis. A very low markup policy makes the APV of a subsidiary's capital expenditure
appear
A. more attractive.
B. less attractive.
C. no impact.
89. Transfer pricing can have an effect on share value
A. to the extent that financial markets are inefficient.
B. to the extent that security analysts do not understand the transfer pricing strategy being used.
C. to the extent that third parties benefit from the transfer price.
D. both a and b
90. With a MNC

A. the decision to set a transfer price is further complicated by import duty considerations.
B. the decision to set a transfer price can be further complicated by exchange rate restrictions imposed by
governments.
C the decision to set a transfer price is further complicated by tax considerations, if there is a difference in
. tax rates between the host country and the home country.
D. all of the above
91. Using transfer prices "creativity" MNCs can
A. try to move blocked funds (but the host country might be watching).
B. evade tax liabilities (but the host country might be watching).
C. both a and b
D. both a and b and there's nothing that the host country government can do about it.
92. Suppose a U.S.-based MNC makes computers with parts from its subsidiary in a low-tax East Asian
country. It can reduce its reported U.S. incomeand increase its subsidiary's profitsby
A. overpaying for the computer components.
B. underpaying for the computer components.
C. paying an arm's length price.
93. The U.S. IRS allows transfer prices to be set using
A. comparable uncontrolled price method.
B. resale price method.
C. cost plus approach.
D. all of the above
94. When the income tax rate in the host country is greater than the tax rate in the parent country,
A. it is beneficial to follow a high markup policy on transferred goods and services from the parent to a
foreign affiliate.
B. it is beneficial to follow a low markup policy on transferred goods and services from the parent to a
foreign affiliate.
C. transfer pricing will not affect the total tax liability, net of foreign tax credit offsets.
95. In the United States foreign-source income is taxed at the same rate as U.S.-earned income and a foreign
tax credit is given against taxes paid to a foreign government. However,
A. the foreign tax credit is limited to the amount of tax that would be due on that income if it were earned
in the United States.
B. if the tax rate paid on foreign-source income is greater than the U.S. tax rate, part of the credit may go
unused.
C. both of the above are true statements.
D. none of the above is true
96. Suppose you are a citizen of the United States with foreign-source income. In the foreign country the tax
rate is 40 percent and your U.S. rate is 30%. For every $10,000 of foreign-source income you will
A. receive a tax credit of $3,000.
B. receive a tax credit of $3,500.
C. receive a tax credit of $4,000.
D. receive a tax credit of $1,000.
97. You are a U.S. MNC with a 40 percent U.S. tax rate. You have an Irish subsidiary. The corporate income
tax there is 12%. For every $10,000,000 of income the subsidiary reports, you will owe taxes to the
U.S. Treasury in the amount of
A. $4,000,000.
B. $1,250,000.
C. $2,750,000.
98. In general the United States claims

A. only a limited taxing jurisdiction over nonresident alien individuals and foreign corporations.
B. unlimited taxing jurisdiction over nonresident alien individuals and foreign corporations.
C. unlimited taxing jurisdiction over resident alien individuals and foreign corporations.
99. A tax haven is
A. a country that has a low corporate income tax rate and low withholding tax rates on passive income.
B. a country with no taxes and no enforcement of foreign tax laws within its borders.
C. any country with a higher tax rate that available domestically.
21 Key
1.
An income tax is a direct tax.

TRUE
Eun - Chapter 21 #1
Topic: Income Tax
2.
The two main objectives of taxation are

A. tax neutrality and tax equity.
B. complexity and revenue.
C. social engineering and tax equity.
D. progressive taxation and tax neutrality.
Eun - Chapter 21 #2
Topic: The Objectives of Taxation
3.
The three basic types of taxation are

B. income tax, withholding tax, and business tax.
C. withholding tax, value-added tax, and corporate tax.
D. personal tax, corporate tax, and operating tax.
Eun - Chapter 21 #3
4.
Tax neutrality is determined

A. by one criterion.
B. by two criteria.
C. by three criteria.
D. by four criteria.
Eun - Chapter 21 #4
Topic: Tax Neutrality
5.
Tax neutrality is determined by three criteria: which of the following doesn't belong?
A. Capital-export neutrality
B. Capital-import neutrality
C. National neutrality
D. Income neutrality
Eun - Chapter 21 #5
6.
Tax neutrality
A. has its foundations in the principles of economic efficiency and equity.
B. can be a difficult principle to apply in practice.
C. is determined by three criteria: capital export neutrality, capital import neutrality and national
neutrality.
D. all of the above
Eun - Chapter 21 #6
7.
The idea that an ideal tax should be effective in raising revenue for the government but not have any
negative effects on the economic decision-making process of the taxpayer is referred to as
Eun - Chapter 21 #7
8.
The idea 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 is referred to as
Eun - Chapter 21 #8
9.

A. is a goal based on worldwide economic efficiency.
B. is an example of Mercantilism.
C. is based on host country economic efficiency.
D. is based on MNC home country economic efficiency.
Eun - Chapter 21 #9
10.
The idea that the tax burden a host country imposes on the foreign subsidiary of a MNC 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
C. National neutrality.
Eun - Chapter 21 #10
11.

Ais 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.
Cimplies 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.
12.
National neutrality
domestic firms.
13.
Capital import neutrality

domestic firms.
14.
The term "capital-import neutrality" refers to

Athe criterion that an ideal tax should be effective in raising revenue for the government and not have
B.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.
Cthe criterion that the tax burden a host country imposes on the foreign subsidiary of a MNC should
. be the same regardless in which country the MNC is incorporated and the same as that placed on
domestic firms.
D underlying principle that all similarly situated taxpayers should participate in the cost of operating
. the government according to the same rules.
15.
The criteria of tax neutrality: capital export neutrality, capital import neutrality and national
neutrality
A. all consistent with one another.
B. are not always consistent with one another.
16.
Implementing capital import neutrality means that

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 a MNC should be the same
. regardless of the country in which the MNC is incorporated.
C. the tax burden a host country imposes on the foreign subsidiary of a MNC should be the same as
that placed on domestic firms.
D. all of the above
17.
Tax equity means that

A. similarly situated taxpayers should participate in the cost of operating the government according to
the same rules.
B. regardless of the country in which an affiliate of a MNC earns taxable income, the same tax rate
and tax due date apply.
C. a dollar earned by a foreign affiliate is taxed under the same rules as a dollar earned by a domestic
affiliate of the MNC.
D. all of the above
Topic: Tax Equity
18.
The underlying principle of tax equity is that

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 above
Topic: Tax Equity
19.
If a dollar earned by a foreign affiliate is taxed under the same rules as a dollar earned by a domestic
affiliate of the MNC, then we have achieved
D. tax equity.
Topic: Tax Equity
20.
The organizational form of a MNC can affect the timing of a tax liability. This means
A. the principle of tax equity might be violated.
B as long as regardless of the country in which an affiliate of a MNC earns taxable income, the same
. tax rates apply, then the tax due date doesn't matter.
C. tax timing will even out over a reporting cycle, so there is no big deal here.
Topic: Tax Equity
21.
There are three basic types of taxation that national governments throughout the world use:
B. property tax, wealth tax, and death tax.
C. import quotas, duties, and tariffs.
D. tariffs, ad valorem taxes, and income taxes.
Topic: Types of Taxation
22.
An income tax is defined by your textbook as

A. is a direct tax.
B. is an indirect tax.
C. is collected with a withholding tax.
Topic: Income Tax
23.
Which statement is false?

A.Active income is defined as income that results from production by the firm or individual or from
services that have been provided.
B. Passive income includes dividends and interest income, and income from royalties, patents, or
copyrights paid to the taxpayer.
C 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.
D The current marginal U.S. income tax rate is positioned towards the lower end of the rates assessed
. by the majority of other countries.
Topic: Income Tax
24.
The current marginal U.S. income tax rate is positioned

A. pretty well in the middle of the rates assessed by the majority of other countries.
B. towards the upper end of the rates assessed by the majority of other countries.
C. towards the lower end of the rates assessed by the majority of other countries.
Topic: Income Tax
25.
A withholding tax is defined by your textbook as

A. the money that the government takes for every worker's paycheck.
B. social security taxes.
C. a tax levied on income earned by an individual (or corporation) of one country within the tax
jurisdiction of another county.
D.a tax levied on passive income earned by an individual (or corporation) of one country within the
tax jurisdiction of another county.
Topic: Withholding Tax
26.
The purpose of a withholding tax

A. is to assure the local tax authority that it will receive the tax due on the active income earned within
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 all income earned within its tax
jurisdiction.
27.
A withholding tax is
A. an indirect tax.
B. a direct tax.
28.
Withholding tax rates imposed through tax treaties are

A. bilateral.
B. multilateral.
C. netted.
29.
The United States withholds ___ of passive income from taxpayers that reside in countries with which
it does not have withholding tax treaties.
A. 10%
B. 20%
C. 30%
D. 40%
E. 50%
30.
A withholding tax
A. is borne by a taxpayer who did not directly generate the income that serves as the source of the
passive income.
B. a direct tax on workers.
C. assures the local tax authority that it will receive the tax due on the passive income earned within
D. both a and c
31.
Many countries have tax treaties with one another. These generally specify
A. the withholding tax rate applied to various types of passive income.
B. that withholding tax rates imposed through tax treaties are bilateral.
C. the two countries agree to impose the same tax rate on the same category of income.
D. all of the above
32.
Value-added tax (VAT) is

A a direct national tax levied on the value added in the production of a good (or service) as it moves
B.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.
C. the equivalent of imposing a national sales tax.
D. both b and c
Topic: Value-Added Tax
33.
Assume that a product has the following three stages of production:
If the value-added tax (VAT) rate is 15%, what is the incremental VAT at Stage 2 of production?
A. 75
B. 120
C. 210
D. 255
34.
A. 90
B. 120
C. 465
D. 255
35.
A. 90
B. 120
C. 465
D. 225
36.
A. 110
B. 120
C. 150
D. 225
37.
A. 64
B. 120
C. 465
D. 225
38.
A. 90
B. 120
C. 300
D. 225
39.
A. 187.50
B. 120
C. 150
D. 225
40.
A. 64
B. 36
C. 465
D. 225
41.
A. 390
B. 120
C. 465
D. 225
42.
A. 150
B. 600
C. 350
D. 225
43.
A. 64
B. 120
C. 2,808
D. 3,000
44.
A value-added tax (VAT) is __________ national tax levied on the value added in the production of a
good (or service) as it moves through the various stages of production.
A. a direct
B. an indirect
C. a sales tax
45.
Tax evasion is more difficult under a VAT because

Aat 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.
B. customers can't convince retailers to sell things without a receipt.
C. the cost of record keeping under a VAT system imposes an economic hardship on small
businesses.
46.
Which of the following are true?

A. A VAT fosters national saving.
B. An income tax is a disincentive to save because the returns from savings are taxed.
C. National tax authorities find that a VAT is easier to collect than an income tax because tax evasion
is more difficult.
D. All of the above are true
47.
Many economists prefer a VAT to an income tax because

A. these economists are pin heads with no real world experience.
B. an income tax provides a disincentive to work, whereas a VAT is a disincentive to unnecessary
consumption.
C. an income tax is an incentive to work, whereas a VAT is a disincentive to consumption.
D. all of the above
48.
In a growing economy, the VAT would raise prodigious amounts of money

A. in a way almost invisible to tax-paying voters.
B. in a way obvious to tax-paying voters.
C. but would discourage savings.
Topic: International Finance in Practice: The TAXING Devil You Know
49.
Fundamentally, there are two types of tax jurisdiction:

A. The worldwide and the territorial.
B. The residential and the visiting.
C. The passive and the active income.
D. The earned and the unearned.
Topic: National Tax Environments
50.
The worldwide method of declaring a national tax jurisdiction

A. is to tax national residents of the country on their worldwide income no matter in which country it
is earned.
C. is to tax national residents of the country on their domestic income but not foreign-earned income.
Topic: Worldwide Taxation
51.
The worldwide or residential method of declaring a national tax jurisdiction is to

A. tax national residents of the country on their worldwide income no matter in which country it is
earned.
B. tax all income earned within the country by any taxpayer, domestic or foreign.
C. tax foreign residents of the country on their home-country income but not foreign-earned income.
52.
The worldwide method of declaring a national tax jurisdiction

A. is also known as the residential method.
B. is to tax national residents of the country on their worldwide income no matter in which country it
is earned.
C. is different from the territorial method of declaring a national tax jurisdiction.
D. all of the above
Topic: Territorial Taxation
53.
The territorial method of declaring a national tax jurisdiction is to

A. tax all income earned within the country by any taxpayer, domestic or foreign.
B. tax national residents of the country on their worldwide income no matter in which country it is
earned.
C. also known as the residential method.
54.
The territorial method of declaring a national tax jurisdiction

A. is to tax national residents of the country on their worldwide income no matter in which country it
is earned.
C. is to tax foreign residents of the country on their home-country income but not foreign-earned
income.
55.
Affiliates of foreign MNCs are taxed on the income earned in the source country under
A. the territorial method of declaring a national tax jurisdiction.
B. the source method of declaring a tax jurisdiction.
C. all of the above
56.
Under the territorial method of declaring a national tax jurisdiction

A. the possibility of double taxation exists if the parent county of a foreign affiliate also levies a tax on
worldwide income.
B. tax is levied on all income earned within the country by any taxpayer, domestic or foreign.
C. tax is levied on foreign residents of the country on their home-country income but not foreignearned income.
57.
The typical approach to avoiding double taxation is

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 nation not to tax foreign-source income of its national residents.
C. for a company to use both worldwide and the territorial methods.
Topic: Foreign Tax Credits
58.
The foreign tax credit method followed by the United States is

A. to grant the parent firm credit against its U.S. tax liability for taxes paid to foreign tax authorities on
B. in place for the purpose of avoiding double taxation.
C. both a and b
59.
A direct foreign tax credit is

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 income taxes deemed paid by the subsidiary.
D. both a and b
60.
In a given year, the U.S. IRS places an overall limitation applied to foreign tax credits.
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 actually paid during the tax year on the
C 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.
61.
A. the maximum tax credit is figured on world-wide foreign-source income; losses in one country can
B. the maximum tax credit is figured on foreign-source income in each country; losses in one country
cannot 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. both a and c
62.
A. The maximum tax credit is figured on world-wide foreign-source income; losses in one country can
B. Value-added taxes paid cannot be included in determining the amount of the foreign tax credit.
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. All of the above
63.
Countries differ in how they tax foreign-source income of their domestic MNCs.
A Therefore, different forms of structuring a multinational organization within a country can result in
. different tax liabilities for the firm.
B. However, due to tax treaties and foreign tax credits, this is not an issue for a U.S.-based MNC.
C. But all countries tax domestic income of their domestic MNCs in the same way.
D. All of the above
Topic: Organizational Structures for Reducing Tax Liabilities
64.
A foreign branch is
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.
corporation.
D. both b and c
Topic: Branch and Subsidiary Income
65.
A foreign subsidiary is
corporation.
D. both b and c
66.
An uncontrolled foreign corporation is

Can 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. b and c
67.
As a general rule,
A. excess tax credits can be carried back two years.
B. excess tax credits can be carried forward five years.
C. excess tax credits must be used in the year recognized.
D. both a and b
68.
An overseas affiliate of a U.S. MNC can be organized

A. as a branch.
B. as a subsidiary.
C. both a and b
69.
When excess tax credits go unused, the foreign tax liability for a branch is greater than the
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%
Foreign tax rate = 39%
Withholding tax rate = 5%
A. 44.00%
B. 35.00%
C. 43.36%
D. 42.05%
70.
When excess tax credits go unused, the foreign tax liability for a branch is greater than the
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:
A.
B.
C.
D.
35.00%
37.00%
43.36%
42.05%
71.
As a rule, payments to and from foreign affiliates,

A. involve the issue of transfer pricing.
B. involve accounting values assigned to goods or services exchanged between foreign affiliates.
C. involve tax credits trading between affiliates.
D. both a and b
Topic: Payments to and from Foreign Affiliates
72.
A transfer price
A. is the price that one division of a firm charges to another division of a firm.
B. is an accounting issue, not a finance issue.
C. does not involve actual cash flows, therefore does not impact the share price.
73.
Suppose a U.S.-based MNC makes bicycles with parts from its subsidiary in a low-tax East Asian
country. The bicycle frames are made here, the component parts (cranksets, wheels, and so on) are
made abroad, the bicycles are assembled in Japan and reimported to the U.S. It can reduce its reported
U.S. incomeand increase its subsidiary's profitsby
A. overcharging its subsidiaries for the U.S.-made frames.
B. undercharging its subsidiaries for the U.S.-made frames.
C. assembling the bicycles in the U.S.
74.
The higher the transfer price

B. the higher the gross profit of the receiving division relative to the transferring division.
C. the higher the gross profit of the transferring division relative to the receiving division.
75.
Affiliate A sells a million units to Affiliate B per year. The marginal income tax rate for 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.
B.
C.
D.
$200
$100
$150
It does not matter.
76.
The U.S. IRS allows transfer prices to be set using the arms-length price.
A. This is a very straight-forward method to use in practicejust use the eBay price.
BThis 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.
C. All of the above
77.
The lower the transfer price

B. the lower the gross profit of the transferring division relative to the receiving division.
C. the higher the gross profit of the receiving division relative to the transferring division.
78.
A "tax haven" country is one that has a low, or zero percent, national tax rates. Some of the countries
that fall into this category are
A. Bahamas, Bahrain, Bermuda, and the Cayman Islands.
B. Denmark, Norway, Switzerland, and Sweden.
C. Bulgaria, Canada, Saudi Arabia, and South Africa.
D. Congo, Egypt, Kuwait, and Zaire.
Topic: Tax Havens
79.
These days the benefits of "tax haven" subsidiaries have been reduced by
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 above
Topic: Tax Havens
80.
A controlled foreign corporation (CFC) is

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. a separate domestic U.S. corporation actively engaged in business in a U.S. possession (Puerto Rico
and the U.S. Virgin Islands).
D. one that has no "overall limitation" as regards to its foreign tax credits.
Topic: Controlled Foreign Corporation
81.
The undistributed income of a minority foreign subsidiary of a U.S. MNC

A. is tax deferred until it is remitted via a dividend.
B. is taxed as imputed income.
C. is withheld under subpart U.S. income restrictions.
82.
There are three production stages required before a bicycle produced by Masi Bicicletia S.A. can be
sold at retail for 4,500. The VAT rate is 15%. Find the total tax liability due.
A. 525
B. 675
C. 3,500
83.
There are three production stages required before a bicycle produced by Masi Bicicletia S.A. can be
sold at retail for 3,500. The VAT rate is 15%. Find the total tax liability due.
A. 525
B. 150
C. 3,500
84.
If U.S. taxing authorities did not limit the amount of the foreign tax credit to the equivalent amount of
the U.S. tax
A. payers would arguably subsidize part of the tax liabilities of U.S. MNC's foreign earned income.
B. national neutrality would suffer.
C. MNCs would all depart our shores.
D. all of the above
85.
Active income
A. that results from production by the firm or individual (of goods or services).
B. is income earned by professional athletes.
C. includes dividend and interest income, since the tax court has ruled that taking risk is a form of
work.
D. none of the above.
86.
The current U.S. marginal tax rate for domestic nonfinancial corporations is 35 percent.
AThis is positioned pretty well in the middle of the rates assessed by the majority of countries, as
. reported in the PriceWaterhouseCoopers annual Corporate Taxes: Worldwide summaries.
B. Is positioned toward the upper end of the rates assessed by the majority of countries.
C But this is reduced on a dollar-for-dollar basis for any and all taxes paid to foreign governments, so
. this is an upper limit for the tax rate faced by U.S. MNCs.
D. All of the above
87.
Transfer pricing can have an effect on how divisions of a MNC are perceived by the local banks.
Which transfer price would leave a local affiliate that imports components from the parent with less
impressive financial statements?
A. High transfer price
B. Low transfer price
C. None of the above
Topic: Transfer Pricing and Related Issues
88.
For a parent that sells goods to a subsidiary, transfer pricing can have an effect on international capital
expenditure analysis. A very low markup policy makes the APV of a subsidiary's capital expenditure
appear
A. more attractive.
B. less attractive.
C. no impact.
89.
Transfer pricing can have an effect on share value

A. to the extent that financial markets are inefficient.
B. to the extent that security analysts do not understand the transfer pricing strategy being used.
C. to the extent that third parties benefit from the transfer price.
D. both a and b
90.
With a MNC
A. the decision to set a transfer price is further complicated by import duty considerations.
B. the decision to set a transfer price can be further complicated by exchange rate restrictions imposed
by governments.
C the decision to set a transfer price is further complicated by tax considerations, if there is a
. difference in tax rates between the host country and the home country.
D. all of the above
91.
Using transfer prices "creativity" MNCs can

A. try to move blocked funds (but the host country might be watching).
B. evade tax liabilities (but the host country might be watching).
C. both a and b
D. both a and b and there's nothing that the host country government can do about it.
92.
Suppose a U.S.-based MNC makes computers with parts from its subsidiary in a low-tax East Asian
country. It can reduce its reported U.S. incomeand increase its subsidiary's profitsby
A. overpaying for the computer components.
B. underpaying for the computer components.
C. paying an arm's length price.
93.
The U.S. IRS allows transfer prices to be set using

A. comparable uncontrolled price method.
B. resale price method.
C. cost plus approach.
D. all of the above
94.
When the income tax rate in the host country is greater than the tax rate in the parent country,
A. it is beneficial to follow a high markup policy on transferred goods and services from the parent to
a foreign affiliate.
B. it is beneficial to follow a low markup policy on transferred goods and services from the parent to a
foreign affiliate.
C. transfer pricing will not affect the total tax liability, net of foreign tax credit offsets.
95.
In the United States foreign-source income is taxed at the same rate as U.S.-earned income and a
foreign tax credit is given against taxes paid to a foreign government. However,
A. the foreign tax credit is limited to the amount of tax that would be due on that income if it were
earned in the United States.
B. if the tax rate paid on foreign-source income is greater than the U.S. tax rate, part of the credit may
go unused.
C. both of the above are true statements.
D. none of the above is true
96.
Suppose you are a citizen of the United States with foreign-source income. In the foreign country
the tax rate is 40 percent and your U.S. rate is 30%. For every $10,000 of foreign-source income you
will
A. receive a tax credit of $3,000.
B. receive a tax credit of $3,500.
C. receive a tax credit of $4,000.
D. receive a tax credit of $1,000.
97.
You are a U.S. MNC with a 40 percent U.S. tax rate. You have an Irish subsidiary. The corporate
income tax there is 12%. For every $10,000,000 of income the subsidiary reports, you will owe
taxes to the U.S. Treasury in the amount of
A. $4,000,000.
B. $1,250,000.
C. $2,750,000.
98.
In general the United States claims

A. only a limited taxing jurisdiction over nonresident alien individuals and foreign corporations.
B. unlimited taxing jurisdiction over nonresident alien individuals and foreign corporations.
C. unlimited taxing jurisdiction over resident alien individuals and foreign corporations.
99.
A tax haven is
A. a country that has a low corporate income tax rate and low withholding tax rates on passive
income.
B. a country with no taxes and no enforcement of foreign tax laws within its borders.
C. any country with a higher tax rate that available domestically.
21 Summary
Category
Eun - Chapter 21
Topic: Income Tax
Topic: International Finance in Practice: The TAXING Devil You Know
Topic: National Tax Environments
Topic: Organizational Structures for Reducing Tax Liabilities
Topic: Tax Equity
Topic: Tax Havens
Topic: Types of Taxation
# of Questions
99
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21

An income tax is a direct tax.

The two main objectives of taxation are

The three basic types of taxation are

Tax neutrality is determined

Capital export neutrality

16. Implementing capital import neutrality means that

23. Which statement is false?

45. Tax evasion is more difficult under a VAT because

53. The territorial method of declaring a national tax jurisdiction is to

71. As a rule, payments to and from foreign affiliates,

90. With a MNC

98. In general the United States claims

An income tax is a direct tax.

The two main objectives of taxation are

The three basic types of taxation are

Tax neutrality is determined

Capital export neutrality

Capital export neutrality

Capital import neutrality

The term "capital-import neutrality" refers to

Implementing capital import neutrality means that

Tax equity means that

The underlying principle of tax equity is that

An income tax is defined by your textbook as

Which statement is false?

The current marginal U.S. income tax rate is positioned

A withholding tax is defined by your textbook as

The purpose of a withholding tax

Withholding tax rates imposed through tax treaties are

Value-added tax (VAT) is

Assume that a product has the following three stages of production:

Assume that a product has the following three stages of production:

Assume that a product has the following three stages of production:

Assume that a product has the following three stages of production:

Assume that a product has the following three stages of production:

Assume that a product has the following three stages of production:

Assume that a product has the following three stages of production:

Assume that a product has the following three stages of production:

Assume that a product has the following three stages of production:

Assume that a product has the following three stages of production:

Assume that a product has the following three stages of production:

Tax evasion is more difficult under a VAT because

Which of the following are true?

Many economists prefer a VAT to an income tax because

In a growing economy, the VAT would raise prodigious amounts of money

Fundamentally, there are two types of tax jurisdiction:

The worldwide method of declaring a national tax jurisdiction

The worldwide or residential method of declaring a national tax jurisdiction is to

The worldwide method of declaring a national tax jurisdiction

The territorial method of declaring a national tax jurisdiction is to

The territorial method of declaring a national tax jurisdiction

Under the territorial method of declaring a national tax jurisdiction

The typical approach to avoiding double taxation is

The foreign tax credit method followed by the United States is

A direct foreign tax credit is

An uncontrolled foreign corporation is

An overseas affiliate of a U.S. MNC can be organized

As a rule, payments to and from foreign affiliates,

The higher the transfer price

The lower the transfer price

A controlled foreign corporation (CFC) is

The undistributed income of a minority foreign subsidiary of a U.S. MNC