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Exam 24: The US Taxation of Multinational Transactions

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Question 21

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Ypsi Corporation has a precredit U.S. tax of $780,000 on $2,000,000 of taxable income in 2014. Ypsi has $400,000 of foreign source taxable income characterized as general category income and $150,000 of foreign source taxable income characterized as passive category income. Ypsi paid $180,000 of foreign income taxes on the general category income and $30,000 of foreign income taxes on the passive category income. What amount of foreign tax credit (FTC) can Ypsi use on its 2014 U.S. tax return and what is the amount of the FTC carryforward, if any?

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$186,000 FTC with an...

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Question 22

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

A) Subpart F causes all income of a controlled foreign corporation to be treated as a deemed dividend to all U.S. persons owning stock in the corporation on the last day of the corporation's tax year.
B) Subpart F causes certain income of a controlled foreign corporation to be treated as a deemed dividend to all U.S. persons owning stock in the corporation on the last day of the corporation's tax year.
C) Subpart F causes certain income of a controlled foreign corporation to be treated as a deemed dividend to only those U.S. shareholders owning stock in the corporation on the last day of the corporation's tax year.
D) Subpart F causes all income of a controlled foreign corporation to be treated as a deemed dividend to only those U.S. shareholders owning stock in the corporation on the last day of the corporation's tax year.

E) A) and B)
F) B) and C)

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Question 23

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Which statement best describes the U.S. framework for taxing non-U.S. persons on income earned from U.S. sources?

Cecilia, a Brazilian citizen and resident, spent 120 days working in the United States in the current year and earned $50,000. Because she spent more than 90 days in the United States, Cecilia's income will be treated as U.S. source and subject to U.S. taxation. The United States does not have an income tax treaty with Brazil.

To be eligible for the "closer connection" exception to the physical presence test, an individual must be in the United States for less than how many days?

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.

The foreign tax credit regime is the primary mechanism used by the United States government to mitigate or eliminate the potential double taxation of income earned by U.S. persons outside the United States.

The Canadian government imposes a withholding tax of 15 percent on a dividend paid by a Canadian corporation to a U.S. individual. The withholding tax will be creditable on the individual's U.S. tax return as an "in lieu of" tax.

Jesse Stone is a citizen and bona fide resident of Great Britain. During 2014, Jesse received the following income: Compensation of $10 million from performing concerts in the United States Cash dividends of $20,000 from a U.S. corporation Interest of $1,000 from a U.S. citizen who is a resident of Ireland Rent of $10,000 from British residents who rented Jesse's townhouse in Orlando, Florida Gain of $50,000 on the sale of stock in a U.S. corporation. Determine the source (U.S. or foreign) of each item of income Jesse received in 2014. $\begin{array} { | c | l | } \hline { \text { Income } } & \text { Source } \\\hline & \\\hline \text { Compensation } & \text { U.S. source } \\\hline \text { Dividend } & \text { U.S. source } \\\hline \text { Interest } & \text { Forcign source } \\\hline \text { Rent } & \text { U.S. source } \\\hline \text { Gain on the sale of stock } & \text { U.S. source } \\\hline\end{array}$

The United States generally taxes U.S. source fixed and determinable, annual or periodic income earned by non-U.S. persons by applying a withholding tax to the gross amount of income.

Which of the following foreign taxes is not a creditable foreign tax for U.S. tax purposes?

Which of the following income earned by a controlled foreign corporation incorporated in Spain is not foreign personal holding company income?

Philippe is a French citizen. During 2014 he spent 150 days in the United States on business. Because Philippe does not spend 183 days in the United States in 2014, he will not be treated as a resident alien for U.S. tax purposes.

"Outbound taxation" deals with the U.S. tax rules that apply to U.S. persons doing business outside the United States.

Appleton Corporation, a U.S. corporation, reported total taxable income of $10,000,000 in 2014. 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 general category income. Appleton paid U.K. income taxes of $750,000 on its branch income. Compute Appleton's net U.S. tax liability and any foreign tax credit carryover for 2014. Assume a U.S. corporate tax rate of 34%.

Horton Corporation is a 100 percent owned Canadian subsidiary of Cruller Corporation, a U.S. corporation. Horton had post-1986 earnings and profits of C$2,400,000 and post-1986 foreign taxes of $1,600,000. During the current year, Horton paid a dividend of C$600,000 to Cruller. The dividend was characterized as general category income for FTC purposes. The dividend was subject to a withholding tax of C$30,000. Assume an exchange rate of C$1 = $1. Cruller reported U.S. taxable income of $2,000,000. Cruller's U.S. tax rate is 34 percent. Compute the tax consequences to Cruller as a result of this dividend.

Rainier Corporation, a U.S. corporation, manufactures and sells quidgets in the United States and Europe. Rainier conducts its operations in Europe through a German GmbH, which the company elects to treat as a branch for U.S. tax purposes. Rainier also licenses the rights to manufacture quidgets to an unrelated company in China. During the current year, Rainier paid the following foreign taxes, translated into U.S. dollars at the appropriate exchange rate: $\begin{array} { | l | r | } \hline { \text { Foreign Taxes } } & \text { Amount (in \$) } \\\hline \text { National income taxes in Germany } & 1,500,000 \\\hline \text { City of Munich income taxes } & 200,000 \\\hline \text { Value-added tax to German government } & 400,000 \\\hline \begin{array} { l } \text { Payroll tax (employer's share of social insurance } \\\text { contributions) to German government }\end{array} & 300,000 \\\hline \text { Withholding tax on royalties received from China } & 100,000 \\\hline\end{array}$ What amount of creditable foreign taxes does Rainier incur?

Nexus involves the criteria used by a government to assert its right to tax a person or transaction within or without its borders.

Which of the following tax benefits does not arise when a U.S. corporation forms a corporation in Ireland through which to earn business profits in Ireland?

Hanover Corporation, a U.S. corporation, incurred $300,000 of interest expense during 2014. Hanover manufactures inventory that is sold within the United States and abroad. The total tax book value and fair market value of its production assets is $20,000,000 and $60,000,000, respectively. The total tax book value and fair market value of its foreign production assets is $5,000,000 and $20,000,000, respectively. What is the minimum amount of interest expense that can be apportioned to the company's foreign source income for foreign tax credit purposes, assuming this is the first year the company makes this computation?