Exam 13: Jurisdictional Issues in Business Taxation

International tax treaties generally allow a government to tax a non-resident firm that maintains a permanent residence in the treaty country.

The UDITPA formula for apportioning income among states is based on four equally weighted factors.

Wilmington, Inc., a Pennsylvania corporation, manufactures computer components that it sells to Seine Corporation, a French company, for assembly into finished products. Wilmington owns 90% of Seine's stock. Wilmington's cost per component is $5, its selling price per component is $16, and it sold 110,000 components to Seine this year. Wilmington's taxable income as reported on its Form 1120 was $2,400,000, and Seine's taxable income as reported on its French corporate income tax return was $1,750,000. Determine the effect on the taxable incomes of both corporations if the IRS determines that an arm's length transfer price per component is $23.

Galaxy Corporation conducts business in the U.S. and in Country X. In which of the following situations will Galaxy not be allowed a foreign tax credit for income taxes paid to Country X?

San Carlos Corporation, a U.S. multinational, had pretax U.S. source income and foreign source income as follows. Corporate tax rate schedule. U.S. source income $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ $ 400,000 Foreign source income-Country W $\quad$ 300,000 Total $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ $ 700,000 San Carlos paid $60,000 income tax to Country W. Calculate San Carlos' tax savings if it takes a foreign tax credit rather than deducting this tax.

The foreign tax credit is available for income taxes paid to a foreign country.

Foreign value-added taxes and excise taxes are eligible for the U.S. foreign tax credit.

The income earned by a foreign branch operation of a U.S. corporation is taxable by the United States only when repatriated.

World Sales, Inc., a U.S. multinational, had pretax U.S. source income and foreign source income as follows. Corporate tax rate schedule. U.S. source income $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ $ 500,000 Foreign source income-Country O $\quad$$\quad$ 200,000 Total $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ $ 700,000 World Sales paid $50,000 income taxes to Country O. What is World Sale's U.S. tax liability if it deducts the foreign taxes paid?

Which of the following activities create state income tax nexus?

Luttrix Inc. does business in Nebraska (6% tax rate) and Colorado (3% tax rate). All other factors being equal, Luttrix will reduce state taxes if it constructs a new manufacturing plant in Colorado.

S. taxpayer can make an annual election to take a credit or a deduction for foreign income taxes paid.

Stockholm Imports Inc., a U.S. multinational, received a $500,000 dividend from its foreign subsidiary in 2016. The subsidiary paid $112,000 foreign income tax with respect to this dividend. Stockholm's U.S. tax rate in 2016 was 34%. If Stockholm had no other foreign source income, compute its deemed paid foreign tax credit.

Origami does business in states X and Y. State X uses an equally-weighted three-factor apportionment formula and has a 4 percent state tax rate. State Y uses an apportionment formula that double-weights the sales factor and has a 6 percent tax rate. Cromwell's taxable income, before apportionment, is $3 million. Its sales, payroll, and property information are as follows. a. Calculate Origami's apportionment factors, income apportioned to each state, and state tax liability. b. State Y is considering changing its apportionment formula to a single sales factor. Given its current level of activity, would such a change increase or decrease Origami's state income tax burden? Provide calculations to support your conclusion.

Lincoln Corporation, a U.S. corporation, owns 50% of the stock of a controlled foreign corporation (CFC). At the beginning of the year, Lincoln's basis in its CFC stock was $100,000. The CFC's current-year income was $1 million, $600,000 of which was subpart F income. The CFC paid no foreign income tax and distributed no dividends. -How much current taxable income must Lincoln report as a result of its ownership of the CFC?

The foreign tax credit is available only for foreign income, excise, value-added, sales, property and transfer taxes.

A bilateral agreement between the governments of England and France defining and limiting each party's respective tax jurisdiction is an example of a tax treaty.

Which of the following statements concerning the taxation of a U.S. multinational corporation is true?

In determining the portion of a firm's total income subject to a state's income tax, most states use an apportionment formula modeled after the Uniform Division of Income for Tax Purposes Act (UDITPA).

The foreign subsidiaries of a U.S. corporation cannot be included in a U.S. consolidated tax return.