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Please answer the following (on page 578 to 581): This is in chapter 11.
1. Exercises and Problems 1 through 6 and 10 through 13
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1. In deciding whether to establish a foreign operation, which factor(s) might a multinational corporation (MNC) consider?
a. After-tax returns from competing investment locations.
b. The tax treatments of branches versus subsidiaries.
c. Withholding rates on dividend and interest payments.
d. All of the above.
2. Why might a company involved in international business find it beneficial to establish an operation in a tax haven?
a. The OECD recommends the use of tax havens for corporate income tax avoidance.
b. Tax havens never tax corporate income.
c. Tax havens are jurisdictions that tend to have abnormally low corporate income tax rates.
d. Tax havens’ banking systems are less secretive.
3. Which of the following item(s) might provide an MNC with a tax-planning opportunity as it decides where to locate a foreign operation?
a. Differences in corporate tax rates across countries.
b. Differences in local tax rates across countries.
c. Whether a country offers a tax holiday.
d. All of the above.
4. Why might companies have an incentive to finance their foreign operations with as much debt as possible?
a. Interest payments are generally tax deductible.
b. Withholding rates are lower for dividends.
c. Withholding rates are lower for interest.
d. Both (a) and (c).
5. Kerry is a U.S. citizen residing in Portugal. Kerry receives some investment income from Spain. Why might Kerry be expected to pay taxes on the investment income to the United States?
a. The United States taxes its citizens on their worldwide income.
b. The United States taxes its citizens on the basis of residency.
c. Portugal requires all of its residents to pay taxes to the United States.
d. None of the above.
6. Poole Corporation is a U.S. company with a branch in China. Income earned by the Chinese branch is taxed at the Chinese corporate income tax rate of 25 percent and at the rate of 35 percent in the United States. What is this an example of?
a. Capital-export neutrality.
b. Double taxation.
c. A tax treaty.
d. Taxation on the basis of consumption.
Questions 10, 11, and 12 are based on the following information:
Information for Year 1, Year 2, and Year 3 for the Andean branch of Powell Corporation is presented in the following table. The corporate tax rate in the Andean Republic in Year 1 was 25 percent. In Year 2, the Andean Republic increased its corporate
income tax rate to 29 percent. In Year 3, the Andean Republic increased its corporate tax rate to 36 percent. The U.S. corporate tax rate in each year is 35 percent.
Year 1 Year 2 Year 3
Foreign source income. . . . . $75,000 $100,000 $100,000
Foreign taxes paid . . . . . . . . 18,750 29,000 36,000
U.S. tax before FTC . . . . . . . 26,250 35,000 35,000
10. For Year 1, Year 2, and Year 3, what is the foreign tax credit allowed in the
a. $7,500, $6,000, and $0.
b. $18,750, $29,000, and $36,000.
c. $75,000, $100,000, and $100,000.
d. $18,750, $29,000, and $35,000.
11. For Year 3, what is the net U.S. tax liability?
12. In Year 3, how much excess foreign tax credit can Powell carry back?
13. Bay City Rollers Inc., a U.S. company, has a branch located in São Antonio and another in the Bahian Islands. The foreign source income from the São Antonio
branch is $150,000, and the foreign source income from the Bahian Island branch is $225,000. The corporate tax rates in São Antonio, the Bahian Islands, and the United States are 30 percent, 24 percent, and 35 percent, respectively.
Determine Bay City Rollers’ ( a ) U.S. foreign tax credit and ( b ) net U.S. tax liability related to these foreign sources of income.
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