Multinational Business Finance, 15e (Eiteman/Stonehill/Moffett) 4) Which of the following is NOT an example of a tax incentive policy?

Chapter 15 Multinational Tax Management A) The federal government gives a tax credit to MNEs that make domestic capital improvements
but not foreign capital improvements.
15.1 Tax Principles and Practices B) Corporations are allowed to take a direct tax credit for each dollar of matching donations they
make to institutions of higher education.
1) The issue of ethics in the reporting of income and the payment of taxes is a considerable one. C) A tax law is passed that makes interest on property non-tax-deductible, but interest payments
The authors state that most MNEs operating in foreign countries tend to follow the general on durable goods are.
principle of: D) All are examples of a tax incentive policy.
A) "when in Rome, do as the Romans do." Answer: D
B) full disclosure to the tax authorities. Diff: 2
C) maintain a competitive playing field by cheating as much as the local competition, no more, L.O.: 15.1 Tax Principles and Practices
no less. Skill: Conceptual
D) none of the above AACSB: Application of knowledge
Answer: B
Diff: 2 5) Toyota Motor Company operates in many different countries and pays taxes at many different
L.O.: 15.1 Tax Principles and Practices rates. However, they always pay the same rate as their local competitors. Toyota Motor
Skill: Conceptual Company is operating in an environment of ________ tax policy.
AACSB: Application of knowledge A) domestic neutrality
B) foreign neutrality
2) Which of the following is an unlikely objective of U.S. government policy for the taxation of C) territorial approach
foreign MNEs? D) none of the above
A) to raise revenues Answer: B
B) to provide an incentive for U.S. private investment in developing countries Diff: 2
C) to improve the U.S. balance of payments L.O.: 15.1 Tax Principles and Practices
D) All of the above are objectives. Skill: Recognition
Answer: D AACSB: Application of knowledge
Diff: 2
L.O.: 15.1 Tax Principles and Practices 6) The United States taxes the domestic and remitted foreign earnings of U.S. based MNEs no
Skill: Recognition matter where the earnings occurred. This is an example of a/an ________ approach to levying
AACSB: Application of knowledge taxes.
A) worldwide
3) A ________ tax policy is one that has no impact on private decision-making, while a B) territorial
________ policy is designed to encourage specific behavior. C) neutral
A) flat; tax incentive D) equitable
B) neutral; flat tax Answer: A
C) neutral; tax incentive Diff: 2
D) none of the above L.O.: 15.1 Tax Principles and Practices
Answer: C Skill: Recognition
Diff: 2 AACSB: Application of knowledge
L.O.: 15.1 Tax Principles and Practices
Skill: Conceptual
AACSB: Application of knowledge
7) The United States taxes all earnings on U.S. soil by both domestic and foreign firms. This is 10) A tax that is effectively a sales tax at each stage of production is defined as a/an ________
an example of a ________ approach to levying taxes. tax.
A) worldwide A) flat
B) neutral B) equitable
C) territorial C) value-added tax
D) none of the above D) none of the above
Answer: C Answer: C
Diff: 2 Diff: 1
L.O.: 15.1 Tax Principles and Practices L.O.: 15.1 Tax Principles and Practices
Skill: Conceptual Skill: Recognition
AACSB: Application of knowledge AACSB: Application of knowledge

8) Bacon Signs Inc. is based in a country with a territorial approach to taxation but generates 11) What is the total value of taxes paid in the following example if the value added tax is 10%?
100% of its income in a country with a worldwide approach to taxation. The tax rate in the A farmer raises wheat that he sells for $1.50 to the grain company. The grain company sells to
country of incorporation is 25%, and the tax rate in the country where they earn their income is the processor for $2.00 per bushel. The processor turns the wheat into a breakfast cereal and
50%. In theory, and barring any special provisions in the tax codes of either country, Bacon wholesales it for $3.00 per bushel. The retailer sells the cereal for $4.00 per bushel.
should pay taxes at a rate of ________ in the country of incorporation. A) $0.15
A) 75%. B) $0.20
B) 62.5%. C) $0.30
C) 0%. D) $0.40
D) 50%. Answer: D
Answer: C Diff: 3
Diff: 3 L.O.: 15.1 Tax Principles and Practices
L.O.: 15.1 Tax Principles and Practices Skill: Analytical
Skill: Analytical AACSB: Analytical thinking
AACSB: Analytical thinking
12) A tax that is a form of social redistribution of income is defined as a/an ________ tax.
9) The territorial approach to taxation policy is also termed the ________ approach. A) un-American
A) source B) transfer
B) ethical C) flat
C) greedy D) none of the above
D) location Answer: B
Answer: A Diff: 2
Diff: 1 L.O.: 15.1 Tax Principles and Practices
L.O.: 15.1 Tax Principles and Practices Skill: Recognition
Skill: Recognition AACSB: Application of knowledge
AACSB: Application of knowledge
13) 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
L.O.: 15.1 Tax Principles and Practices
Skill: Recognition
AACSB: Application of knowledge
14) The primary objective of multinational tax planning is to minimize the firm's worldwide tax 19) Among the G7 nations, the U.S. has a below average corporate income tax rate that makes it
burden. attractive for other countries to invest in the U.S.
Answer: TRUE Answer: FALSE
Diff: 1 Diff: 2
L.O.: 15.1 Tax Principles and Practices L.O.: 15.1 Tax Principles and Practices
Skill: Recognition Skill: Recognition
AACSB: Application of knowledge AACSB: Application of knowledge

15) A country CANNOT have both a territorial and a worldwide approach as a national tax 20) In the mid-1980s, the U.S. led the way to higher corporate income tax rates worldwide.
policy. Today, most of the G7 nations have surpassed the U.S. and have higher corporate income tax
Answer: FALSE rates than the U.S.
Diff: 1 Answer: FALSE
L.O.: 15.1 Tax Principles and Practices Diff: 2
Skill: Conceptual L.O.: 15.1 Tax Principles and Practices
AACSB: Application of knowledge Skill: Recognition
AACSB: Application of knowledge
16) Tax treaties generally have the effect of increasing the withholding taxes between the
countries that are negotiating the treaties. 21) The ideal tax should not only raise revenue efficiently but also have as few negative effects
Answer: FALSE on economic behavior as possible.
Diff: 1 Answer: TRUE
L.O.: 15.1 Tax Principles and Practices Diff: 2
Skill: Conceptual L.O.: 15.1 Tax Principles and Practices
AACSB: Application of knowledge Skill: Conceptual
AACSB: Application of knowledge
17) A value-added tax has gained widespread usage in Western Europe, Canada, and parts of
Latin America. 22) The worldwide approach, also referred to as the residential or national approach to tax
Answer: TRUE policy, levies taxes on the income earned by firms that are incorporated in the host country,
Diff: 1 regardless of where the income was earned (domestically or abroad).
L.O.: 15.1 Tax Principles and Practices Answer: TRUE
Skill: Recognition Diff: 2
AACSB: Application of knowledge L.O.: 15.1 Tax Principles and Practices
Skill: Recognition
18) All indications are that the value-added tax will soon be the dominant form of taxation in the AACSB: Application of knowledge
U.S.
Answer: FALSE 23) The territorial approach, also referred to as the source approach to tax policy, levies taxes on
Diff: 1 the income earned by firms that are incorporated in the host country, regardless of where the
L.O.: 15.1 Tax Principles and Practices income was earned (domestically or abroad).
Skill: Recognition Answer: FALSE
AACSB: Application of knowledge Diff: 2
L.O.: 15.1 Tax Principles and Practices
Skill: Recognition
AACSB: Application of knowledge
24) Of the OECD 30 countries, most employ a worldwide approach to tax policy, but a few, this form of taxation has NOT been widely accepted in the United States?
including the United States, use the worldwide approach. Answer: A value-added tax (VAT) is a form of national sales tax, where goods are taxed at each
Answer: TRUE step of extraction, production, wholesale, and retail. A VAT tax is considered regressive because
Diff: 2 those with lower incomes pay the same taxes on a particular commodity as those with more
L.O.: 15.1 Tax Principles and Practices money. Americans have never taken to this type of national tax because the most similar type of
Skill: Recognition state and local tax is the sales tax, and that has always been the domain of the states. Plus the fact
AACSB: Application of knowledge that it is regressive make the tax a tough sell to taxpayers.
Diff: 3
25) FEW governments rely on income taxes, both personal and corporate, for their primary L.O.: 15.1 Tax Principles and Practices
revenue source. Skill: Conceptual
Answer: FALSE AACSB: Application of knowledge
Diff: 2
L.O.: 15.1 Tax Principles and Practices 15.2 Multinational Tax Management
Skill: Recognition
AACSB: Application of knowledge TABLE 15.1
Use the information to answer following question(s).
26) Between 2006-2012, global corporate tax rates have trended upward.
Answer: FALSE BayArea Designs Inc., located in Northern California, has two international subsidiaries, one
Diff: 2 located in the Ukraine, the other in Korea. Consider the information below to answer the next
L.O.: 15.1 Tax Principles and Practices several questions.
Skill: Recognition
AACSB: Application of knowledge

27) Tax treaties typically result in reduced withholding tax rates between the two signatory
countries.
Answer: TRUE
Diff: 2 1) Refer to Table 15.1. If BayArea pays out 50% of its earnings from each subsidiary, what are
L.O.: 15.1 Tax Principles and Practices the additional U.S. taxes due on the foreign sourced income from the Ukraine and Korea
Skill: Recognition respectively?
AACSB: Application of knowledge A) Ukraine = $0; Korea = ($30,000)
B) Ukraine = $100,000; Korea = $0
28) Explain the worldwide and territorial approaches of national taxation. The authors state that C) Ukraine = $0; Korea = $66,250
the United States uses both approaches. How can this be? Give an example of each taxation D) none of the above
approach. Answer: D
Answer: The worldwide approach taxes the income of firms based on their place of residence Diff: 3
rather than on where the income was earned. Thus, a U.S. based MNE will owe U.S. taxes on L.O.: 15.2 Multinational Tax Management
income earned in, say, Britain. The territorial approach to taxation taxes all of the income earned Skill: Analytical
within the borders of the country by both domestic and foreign-based firms. Thus, a British- AACSB: Analytical thinking
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
L.O.: 15.1 Tax Principles and Practices
Skill: Analytical
AACSB: Analytical thinking

29) What is a value-added tax? Where is this type of tax in wide usage? Why do you suppose
2) Refer to Table 15.1. The additional U.S. taxes due on the repatriation of income from the 5) Refer to Table 15.1. What is the minimum effective tax rate that BayArea can achieve on its
Ukraine to the United States, alone, assuming a 50% payout rate, is: foreign-sourced income?
A) excess foreign tax credits of $110,000. A) 26%
B) additional U.S. taxes due of $97,000. B) 35%
C) additional U.S. taxes due of $36,500. C) 40%
D) excess foreign tax credits of $18,500. D) 0%
Answer: A Answer: B
Diff: 3 Diff: 3
L.O.: 15.2 Multinational Tax Management L.O.: 15.2 Multinational Tax Management
Skill: Analytical Skill: Analytical
AACSB: Analytical thinking AACSB: Analytical thinking

3) Refer to Table 15.1. How much in additional U.S. taxes would be due if BayArea averaged 6) A ________ is a direct reduction of taxes whereas a ________ reduces the taxable income
the tax credits and liabilities of the two foreign units, assuming a 50% payout rate from each? before taxes.
A) $3,750 A) foreign tax credit; domestic tax credit
B) $13,750 B) tax deduction; tax credit
C) $2,500 C) tax credit; tax deduction
D) $0 D) none of the above
Answer: C Answer: C
Diff: 3 Diff: 2
L.O.: 15.2 Multinational Tax Management L.O.: 15.2 Multinational Tax Management
Skill: Analytical Skill: Recognition
AACSB: Analytical thinking AACSB: Application of knowledge

4) Refer to Table 15.1. If BayArea set the payout rate from the Ukraine subsidiary at 25%, how Instruction 15.2:
should BayArea set the payout rate of the Korean subsidiary (approximately) to more efficiently Use the information to answer the following question(s).
manage its total foreign tax bill?
A) 28.5% Green Valley Exporters USA has $100,000 of before-tax foreign income. The host country has a
B) 24.5% corporate income tax rate of 25% and the U.S. has a corporate income tax rate of 35%.
C) 42.6%
D) 82.3% 7) Refer to Instruction 15.2. If the U.S. has no bilateral trade agreement with the host country,
Answer: B what is the total amount of income taxes Green Valley Exporters will pay?
Diff: 3 A) $25,000
L.O.: 15.2 Multinational Tax Management B) $35,000
Skill: Analytical C) $51,250
AACSB: Analytical thinking D) $60,000
Answer: C
Diff: 3
L.O.: 15.2 Multinational Tax Management
Skill: Analytical
AACSB: Analytical thinking
8) Refer to Instruction 15.2. If the U.S. has a bilateral trade agreement with the host country that 11) Transfer pricing is a strategy that may be used by MNEs to:
calls for the total tax paid to be equal to the maximum amount that could be paid in the highest A) reduce consolidated corporate income taxes.
taxing country, what is the total amount of income taxes Green Valley Exporters will pay to the B) partially finance a subsidiary in another country.
host country, and how much will they pay in U.S income taxes on the foreign earned income? C) transfer funds from a subsidiary to the parent corporation.
A) $25,000; $10,000 D) all of the above
B) $25,000; $26,250 Answer: D
C) $35,000; $0 Diff: 2
D) none of the above L.O.: 15.2 Multinational Tax Management
Answer: A Skill: Recognition
Diff: 3 AACSB: Application of knowledge
L.O.: 15.2 Multinational Tax Management
Skill: Analytical 12) ________ is the pricing of goods, services, and technology between related companies.
AACSB: Analytical thinking A) Among pricing
B) Retail pricing
9) Refer to Instruction 15.2. If the U.S. treated the taxes paid on income earned in the host C) Transfer pricing
country as a tax-deductible expense, then Green Valley's total U.S. corporate tax on the foreign D) Wholesale pricing
earnings would be: Answer: C
A) $10,000. Diff: 1
B) $26,250. L.O.: 15.2 Multinational Tax Management
C) $35,000. Skill: Recognition
D) $51,250. AACSB: Application of knowledge
Answer: B
Diff: 3 13) Tax-haven subsidiaries are typically established in a country that can meet the following
L.O.: 15.2 Multinational Tax Management requirements:
Skill: Analytical A) a low tax on foreign investment or sales income earned by resident corporations and a low
AACSB: Analytical thinking dividend withholding tax on dividends paid to the parent firm.
B) the facilities to support financial services, for example, good communications, professional
10) Refer to Instruction 15.2. If the U.S. treated the taxes paid on income earned in the host qualified office workers, and reputable banking services.
country as a tax-credit, then Green Valley's total U.S. corporate tax on the foreign earnings C) a stable government that encourages the establishment of foreign-owned financial and service
would be: facilities within its borders.
A) $51,250. D) all of the above
B) $35,000. Answer: D
C) $26,250. Diff: 2
D) $10,000. L.O.: 15.2 Multinational Tax Management
Answer: D Skill: Recognition
Diff: 3 AACSB: Application of knowledge
L.O.: 15.2 Multinational Tax Management
Skill: Analytical
AACSB: Analytical thinking
14) The rapid evolution of corporate inversions for U.S.-based multinationals over the past 20 19) If a U.S. multinational remits profits from two different countries (subsidiaries) back to the
years has been attributed to all of the following EXCEPT: parent company (U.S.), the excess foreign tax credit from one subsidiary can only be cross-
A) lack of foreign tax credits. credited against another subsidiary from the same country.
B) relatively high U.S. corporate tax rate. Answer: FALSE
C) U.S. lack of global competitiveness. Diff: 2
D) the worldwide tax principles. L.O.: 15.2 Multinational Tax Management
Answer: A Skill: Recognition
Diff: 2 AACSB: Application of knowledge
L.O.: 15.2 Multinational Tax Management
Skill: Recognition 20) Tax haven subsidiaries of MNEs are categorically referred to as international offshore
AACSB: Application of knowledge financial centers.
Answer: TRUE
15) Of the following, which is NOT cited by the authors as an example of tax haven? Diff: 2
A) Ireland L.O.: 15.2 Multinational Tax Management
B) Bermuda Skill: Recognition
C) Cayman Islands AACSB: Application of knowledge
D) Bahamas
Answer: A 21) Maximizing local profits in joint ventures overseas could be suboptimal from the overall
Diff: 2 view of the MNE.
L.O.: 15.2 Multinational Tax Management Answer: TRUE
Skill: Recognition Diff: 2
AACSB: Application of knowledge L.O.: 15.2 Multinational Tax Management
Skill: Recognition
16) Tax credits are less valuable on a dollar-for-dollar basis than are tax-deductible expenses. AACSB: Application of knowledge
Answer: FALSE
Diff: 1 22) In a typical naked corporate inversion transaction, the corporation's effective global tax
L.O.: 15.2 Multinational Tax Management liability is reduced, but the effective control does not change.
Skill: Conceptual Answer: TRUE
AACSB: Application of knowledge Diff: 2
L.O.: 15.2 Multinational Tax Management
17) The U.S. Internal Revenue Service can reallocate revenues and expenses between parent Skill: Recognition
corporations and their subsidiaries to more clearly reflect a proper allocation of income. In such AACSB: Application of knowledge
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 proved innocent" tax approach. 23) The 80% rule added in the American Jobs Creation Act (AJCA) of 2004 makes less likely
Answer: TRUE that the former parent company would continue to be treated as domestic.
Diff: 2 Answer: FALSE
L.O.: 15.2 Multinational Tax Management Diff: 2
Skill: Recognition L.O.: 15.2 Multinational Tax Management
AACSB: Application of knowledge Skill: Recognition
AACSB: Application of knowledge
18) When a firm is organized with decentralized profit centers, transfer pricing between centers
can help in the evaluation of each subsidiary performance.
Answer: FALSE
Diff: 2
L.O.: 15.2 Multinational Tax Management
Skill: Recognition
AACSB: Application of knowledge
24) One case of inversion is when a U.S. company is merged with a large foreign firm and the active income?
new combined entity is incorporated in the foreign country. The added stipulation to be a valid Answer: One type of passive income would simply be the distributed profits of another
inversion is that the previous U.S. ownership must have a position of less than 80% ownership in company, dividends, if the foreign company owned it. Without the differential treatment, it
the new combined entity. would only make sense for most U.S. multinationals to create a holding company in a tax haven,
Answer: FALSE which would then own all the foreign subsidiaries of the company. Then, all the profits earned by
Diff: 2 the Holding Company would be retained in a low tax environment without incurring any U.S. tax
L.O.: 15.2 Multinational Tax Management liabilities.
Skill: Recognition Diff: 2
AACSB: Application of knowledge L.O.: 15.2 Multinational Tax Management
Skill: Conceptual
25) Finance ministers of the G20 in conjunction with the OECD created an action plan to stop AACSB: Application of knowledge
basis erosion and profit shifting (BEPS) in an effort to stop illegal activity.
Answer: FALSE 15.3 Google: An Illustrative Case of Profit Repositioning
Diff: 2
L.O.: 15.2 Multinational Tax Management 1) Why is it core to Google's tax planning to fix a tax base (also known as permanent
Skill: Recognition establishment) in Ireland?
AACSB: Application of knowledge Answer: Permanent establishment rules allow firms such as Google to fix a tax base in a low-
tax country like Ireland, while generating lots of business in a country where tax rates are higher,
26) What is a transfer price, and can a government regulate it? What difficulties and motives like France. Companies in principle are taxed not on "where they do business," but on "where
does a parent multinational firm face in setting transfer prices? they finalize their business deals with customers" —the country or jurisdiction where the final
Answer: A transfer price is the amount paid by one unit of a company (domestic or contract is signed. In the case of Google, that means most sales throughout the European Union
international) for goods or services purchased from another unit of the same firm. As such, a are finalized in Ireland. It is estimated that 75% of the top 50 U.S. software, Internet, and
transfer price is needed for every intrafirm transaction. Where buyer and seller are in different computer hardware companies use similar PE structures that help them avoid taxes.
tax jurisdictions (i.e., countries), governments are concerned with the possibility that transfer Diff: 2
prices are raised or lowered from a "normal" or "appropriate" level in order to avoid taxes. In L.O.: 15.3 Google: An Illustrative Case of Profit Repositioning
most countries tax authorities have the right to declare a given international transfer price as a tax Skill: Conceptual
avoidance device. Such countries have the right to reset taxable income to a higher level. The AACSB: Application of knowledge
motives for the parent MNE are to minimize taxes, and the difficulty is that the burden of proof
is on the MNE, not the tax collector, to show proof as to why a given transfer price is reasonable. 15.4 Global Tax Competitiveness
Diff: 2
L.O.: 15.2 Multinational Tax Management 1) The changing global tax environment for multinational firms has been attributed to all of the
Skill: Conceptual following EXCEPT:
AACSB: Application of knowledge A) rapid expansion of the global digital economy.
B) aggressiveness of governments to increase their individual tax competitiveness.
27) What are the desired characteristics for a country if it expects to be used as a tax haven? C) increase cost of capital.
Answer: Tax-haven subsidiaries are typically established in a country that can meet the D) all of the above
following requirements: 1) A low tax on foreign investment or sales income earned by resident Answer: C
corporations and a low dividend withholding tax on dividends paid to the parent firm. 2) A stable Diff: 2
currency to permit easy conversion of funds into and out of the local currency. 3) The facilities to L.O.: 15.4 Global Tax Competitiveness
support financial services: good communications, professional qualified office workers, and Skill: Conceptual
reputable banking services. 4) A stable government that encourages the establishment of foreign- AACSB: Application of knowledge
owned financial and service facilities within its borders.
Diff: 2
L.O.: 15.2 Multinational Tax Management
Skill: Conceptual
AACSB: Application of knowledge

28) Why do the U.S. tax authorities tax passive income generated offshore differently from
2) Governments worldwide compete for global investment on all of the following grounds 15.5 U.S. Tax Law Change in 2017
EXCEPT:
A) availability of skilled labor. 1) The Act of 2017 has multiple provisions; the following are likely of the most significant to all
B) labor cost. U.S. companies EXCEPT:
C) regulatory requirements. A) U.S. corporate income tax rate is reduced to 21%.
D) all of the above B) Limits the net interest deductions.
Answer: D C) Allows companies to deduct the entire cost of equipment purchases from their taxable
Diff: 2 income.
L.O.: 15.4 Global Tax Competitiveness D) all of the above
Skill: Conceptual Answer: D
AACSB: Application of knowledge Diff: 2
L.O.: 15.5 U.S. Tax Law Change in 2017
3) In the context of the digital economy many tax authorities are redefining the location of a Skill: Conceptual
taxable transaction from the county of the supplier to the country of the buyer. AACSB: Application of knowledge
Answer: TRUE
Diff: 1 2) As part of the Act of 2017, the taxation of Foreign-Source Income will not create tax credits
L.O.: 15.4 Global Tax Competitiveness or deficits when declared as dividends to the U.S. parent.
Skill: Recognition Answer: TRUE
AACSB: Application of knowledge Diff: 1
L.O.: 15.5 U.S. Tax Law Change in 2017
4) All the OECD countries depend on individual income taxes for a very large part of their tax Skill: Recognition
proceeds. AACSB: Application of knowledge
Answer: FALSE
Diff: 1
L.O.: 15.4 Global Tax Competitiveness
Skill: Recognition
AACSB: Application of knowledge

5) Tax analysts and authorities believe that in the years ahead most of the world will move
towards increased use of direct taxes — income taxes.
Answer: FALSE
Diff: 1
L.O.: 15.4 Global Tax Competitiveness
Skill: Recognition
AACSB: Application of knowledge