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Chapter 25 Taxation Of International Transactions
Discussion Questions
1. LO.1 “U.S. persons are taxed on their worldwide income.” Explain.
2. LO.1, 5 Liang, a U.S. citizen, owns 100% of ForCo, a foreign corporation not engaged in a U.S. trade or business. Is Liang subject to any U.S. income tax on her dealings with ForCo? Explain.
3. LO.5 Randall operates his distribution business in several countries. He wants to move some equipment to a new office in South Africa. This equipment includes assets with a large acquisition price and accumulated MACRS depreciation.
The assets to be transferred would generate a $1 million realized gain if sold. Advise
Randall on the tax effects of his proposed asset transfer.
4. LO.5 Joy Marcus owns several income-producing assets, including a stock portfolio and a small services proprietorship. She wants to start up a new corporation in the country Molto, where the income tax rates are about one-third of those in the
United States, and transfer all of her assets and operations there.
How tax-effective is Joy’s plan in shifting the income from her activities when they are placed in the Molto corporation? Write a memo for the tax research file highlighting the Federal income tax rules that apply.
5. LO.5 Five unrelated U.S. individuals own all of the shares of Popping, a corporation organized in the United States but operating fully in the country Vivace. Mariam, one of the shareholders, asks you whether the income from Popping will be taxed to her immediately as earned, as she believes the entity is classified as “a controlled foreign corporation (CFC).” Explain how the Federal income tax law applies to the profits earned by Popping. Use the correct Federal income tax terminology in your comments.
6. LO.5 QuinnCo could not claim all of the income taxes it paid to Japan as a foreign tax credit (FTC) this year. What computational limit probably kept QuinnCo from taking its full FTC? Explain.
7. LO.5 Molly, Inc., a domestic corporation, owns 15% of PJ, Inc., and 12% of Emma,
Inc., both foreign corporations. Molly is paid gross dividends of $35,000 and $18,000 from PJ and Emma, respectively. PJ withheld and paid more than $10,500 in foreign taxes on the $35,000 dividend.
PJ’s country of residence levies a 20% tax on dividends paid to nonresident corporations.
However, the tax rate is increased to 30% if the recipient is a resident of a country that provides an FTC. Taxes of $3,600 are withheld on the dividend from Emma.
What tax issues must be considered in determining the availability and amount of the FTC allowed to Molly, Inc.?
8. LO.5 HiramCo, a U.S. entity, operates a manufacturing business in both Mexico and Costa Rica, and it holds its investment portfolio in Sweden. How many foreign tax credit computations must HiramCo make? Be specific, and use the term basket in your answer.
9. LO.6 Write a memo for the tax research file on the difference between “inbound” and “outbound” activities in the context of U.S. taxation of international income.
10. LO.1, 3, 5 Draft a short speech that you will give to your university’s Business Club.
The title of your talk is “What Is Worldwide Taxation and How Can
I Avoid It?”