Chapter 24 The U.S. Taxation of Multinational Transactions

39. (LO 1) Camille, a citizen and resident of Country A, received a $1,000 dividend from a corporation organized in Country B. Which statement best describes the taxation of this income under the two different approaches to taxing foreign income?

a.Country B will not tax this income under a residence-based jurisdiction approach but will tax this income under a source-based jurisdiction approach.

b. Country B will tax this income under a residence-based jurisdiction approach but will not tax this income under a source-based jurisdiction approach.

c. Country B will tax this income under both a residence-based jurisdiction approach and a source-based jurisdiction approach.

d. Country B will not tax this income under either a residence-based jurisdiction approach or a source-based jurisdiction approach.

Answer:

40. (LO 1) Spartan Corporation, a U.S. corporation, reported $2 million of pretax income from its business operations in Spartania, which were conducted through a foreign branch. Spartania taxes branch income at 25%, and the United States taxes corporate income at 35%.

a. If the United States provided no mechanism for mitigating double taxation, what would be the total tax (U.S. and foreign) on the $2 million of branch profits?

c. Assume the United States allows U.S. corporations to claim a deduction for foreign income taxes. What would be the total tax on the $2 million of branch profits?

41. (LO 1) Guido is a citizen and resident of Belgium. He has a full-time job in Belgium and has lived there with his family for the past 10 years. In 2012, Guido came to the United States for the first time. The sole purpose of his trip was business. He intended to stay in the United States for only 180 days, but he ended up staying for 210 daysbecause of unforeseen problems with his business. Guido came to the United States again on business in 2013 and stayed for 180 days. In 2014 he came back to the United States on business and stayed for 70 days. Determine if Guido meets the U.S. statutory definition of a resident alien in 2012, 2013, and 2014 under the substantial presence test.

42. (LO 1) {research} Use the facts in problem 41. If Guido meets the statutory requirements to be considered a resident of both the United States and Belgium, what criteria does the U.S.-Belgium treaty use to “break the tie” and determine Guido’s country of residence? Look at Article 4 of the 2007 U.S.-Belgium income tax treaty, which you can find on the IRS website, www.irs.gov.

43. (LO 1) {research} How does the U.S.-Belgium treaty define a permanent establishment for determining nexus? Look at Article 5 of the 2007 U.S.-Belgium income tax treaty, which you can find on the IRS Website, www.irs.gov.

Answer:

44. (LO 1) Mackinac Corporation, a U.S. corporation, reported total taxable income of $5 million. Taxable income included $1.5 million of foreign source taxable income from the company’s branch operations in Canada. All of the branch income is general category income. Mackinac paid Canadian income taxes of $600,000 on its branch income. Compute Mackinac’s allowable foreign tax credit. Assume a U.S. corporate tax rate of 34%.

45. (LO 1) Waco Leather, Inc., a U.S. corporation, reported total taxable income of $5 million. Taxable income included 1.5 million of foreign source taxable income from the company’s branch operations in Mexico. All of the branch income is general category income. Waco paid Mexican income taxes of $420,000 on its branch income. Compute Waco’s allowable foreign tax credit. Assume a U.S. corporate tax rate of 34%.

46. (LO 2) Petoskey Stone, Inc., a U.S. corporation, received the following sources of income during the current year. Identify the source of each item as either U.S. or foreign.

47. (LO 2) Carmen SanDiego, a U.S. citizen, is employed by General Motors Corporation, a U.S. corporation. On April 1, 2014, GM relocated Carmen to its Brazilian operations for the remainder of 2014. Carmen was paid a salary of $120,000 and was employed on a 5-day week basis. As part of her compensation package for moving to Brazil, Carmen also received a housing allowance of $25,000. Carmen’s salary was earned ratably over the twelve month period. During 2014 Carmen worked 260 days, 195 of which were in Brazil and 65 of which were in Michigan. How much of Carmen’s total compensation is treated as foreign source income for 2014? Why might Carmen want to maximize her foreign source income in 2014?

Answer:

48. (LO 2) John Elton is a citizen and bona fide resident of Great Britain (United Kingdom). During the current year, John received the following income:

• Compensation of $30 million from performing concerts in the United States
• Cash dividends of $10,000 from a French corporation stock
• Interest of $6,000 on a U.S. corporation bond
• Interest of $2,000 on a loan made to a U.S. citizen residing in Australia
• Gain of $80,000 on the sale of stock in a U.S. corporation

Determine the source (U.S. or foreign) of each item of income John received.

49. (LO 2) Spartan Corporation, a U.S. company, manufactures green eye shades for sale in the United States and Europe. All manufacturing activities take place in Michigan. During the current year, Spartan sold 10,000 green eye shades to European customers at a price of $10 each. Each eye shade costs $4 to produce. All of Spartan’s production assets are located in the United States. For each independent scenario, determine the source of the gross income from sale of the green eye shades.

a. Spartan ships its eye shades F.O.B., place of destination.

b. Spartan ships its eye shades F.O.B., place of shipment.