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Exam 24: The Us Taxation of Multinational Transactions

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Question 1

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Which statement best describes the U.S. framework for taxing multinational transactions?

A) The U.S. government applies source-based taxation to income earned by U.S. and non-U.S. persons.
B) The U.S. government applies residence-based taxation to income earned by U.S. and non-U.S. persons.
C) The U.S. government applies residence-based taxation to income earned by U.S. persons and source-based taxation to income earned by non-U.S. persons.
D) The U.S. government applies source-based taxation to income earned by U.S. persons and residence-based taxation to income earned by non-U.S. persons.

E) A) and B)
F) All of the above

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C

Question 2

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Polka Corporation is a 100 percent owned Poland subsidiary of Pierogi Inc., a U.S. corporation. During the current year, Polka paid a dividend of €525,000 to Pierogi. The dividend was subject to a withholding tax of €26,250. Assume an exchange rate of €1 = $1.50. Pierogi reported U.S. taxable income of $1,000,000. Compute Pierogi's net U.S. tax liability for the current year and excess FTC, if any.

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Net U.S. t...

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Question 3

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A hybrid entity established in Ireland is treated as a flow-through entity for U.S. tax purposes and a corporation for Irish tax purposes.

Horton Corporation is a 100 percent owned Canadian subsidiary of Cruller Corporation, a U.S. corporation. During the current year, Horton paid a dividend of C$600,000 to Cruller. The dividend was subject to a withholding tax of C$30,000. Assume an exchange rate of C$1 = $1. Cruller reported U.S. source taxable income of $2,000,000 before considering the dividend received from Horton Corporation. Compute the tax consequences to Cruller as a result of this dividend.

All income earned by a Swiss corporation owned by a U.S. corporation is deferred from U.S. taxation until such income is remitted back to the United States.

Russell Starling, an Australian citizen and resident, received the following investment income during 2018: $5,000 of dividend income from ownership of stock in a U.S. corporation, $10,000 interest from a certificate of deposit in a U.S. bank, $3,000 of interest income earned from a loan to Clint Westwood, a U.S. citizen, and $2,000 capital gain from sale of a stock in a U.S. corporation. How much of Russell's income will be subject to U.S. taxation in 2018?

Manchester Corporation, a U.S. corporation, incurred $100,000 of interest expense during 2018. Manchester manufactures inventory that is sold within the United States and abroad. The total tax book value of its U.S. production assets is $20,000,000. The total tax book value of its foreign production assets is $5,000,000. What amount of interest expense is apportioned to the company's foreign source income for foreign tax credit purposes, assuming this is the first year the company makes this computation and the interest expense is fully deductible in 2018?

Windmill Corporation, a Dutch corporation, is owned by the following unrelated persons: 50 percent by a U.S. corporation, 5 percent by a U.S. individual, and 45 percent by a Swiss corporation. During the year, Windmill earned $2,000,000 of subpart F income. Which of the following statements is true about the application of subpart F to the income earned by Windmill?

A Japanese corporation owned by eleven U.S. individuals cannot be treated as a controlled foreign corporation for U.S. tax purposes.

Which of the following statements best describes the operation of subpart F as it applies to income earned by a foreign corporation?

Under most U.S. treaties, a resident of the other country must have a permanent establishment in the United States before being subject to U.S. taxation on business profits earned within the United States.

Which of the following exceptions could cause subpart F income to be excluded from the deemed dividend regime?

Which of the following is not a benefit derived from an income tax treaty between the United States and another country?

Gouda, S.A., a Belgium corporation, received the following sources of income during 2018: $10,000 interest income from a loan to its 100 percent owned Dutch subsidiary $20,000 dividend income from its 100 percent owned U.S. subsidiary $30,000 royalty income from its Irish subsidiary for use of a trademark outside the United States $40,000 rent income from its Canadian subsidiary for use of a warehouse located in Wisconsin $5,000 capital gain from sale of stock in its 40 percent owned New Zealand joint venture. Title passed in New Zealand. What amount of U.S. source income does Gouda have in 2018?

Austin Corporation, a U.S. corporation, received the following investment income during 2018: $50,000 of dividend income from ownership of stock in a French corporation, $20,000 interest on a loan to its Dutch subsidiary, $40,000 royalty from its 50-percent owned Irish venture, and $30,000 capital gain from sale of its stock in a Brazilian corporation. How much foreign source income does Austin have in 2018?

Jimmy Johnson, a U.S. citizen, is employed by General Motors Corporation, a U.S. corporation. In June 2018, General Motors relocated Jimmy to its operations in Germany for the remainder of 2018. Jimmy was paid a salary of $250,000. As part of his compensation package for moving to Germany, Jimmy received a cost of living allowance of $30,000, which was paid to him only while he worked in Germany. Jimmy's salary was earned ratably over the twelve-month period. During 2018 Jimmy worked 260 days, 130 of which were in Germany and 130 of which were in the United States. How much of Jimmy's total compensation is treated as foreign source income for 2018?

Appleton Corporation, a U.S. corporation, reported total taxable income of $10,000,000 in 2018. Taxable income included $2,500,000 of foreign source taxable income from the company's branch operations in the United Kingdom. All of the branch income is foreign branch income. Appleton paid U.K. income taxes of $500,000 on its branch income. Compute Appleton's net U.S. tax liability and any foreign tax credit carryover for 2018.

A U.S. corporation can use hybrid entities to avoid the application of subpart F to cross border payments made between wholly owned entities outside the United States.

Hanover Corporation, a U.S. corporation, incurred $300,000 of interest expense during 2018. Hanover manufactures inventory that is sold within the United States and abroad. The total tax book value of its production assets is $20,000,000. The total tax book value of its foreign production assets is $5,000,000. What amount of interest expense is apportioned to the company's foreign source income for foreign tax credit purposes, assuming this is the first year the company makes this computation and the interest expense is fully deductible?

Which of the following tax or non-tax benefits does not arise when a U.S. corporation forms a hybrid entity in Germany through which to earn business profits in Germany and elects to have the entity treated as a branch for U.S. tax purposes?