Preview Extract
INTERNATIONAL TAX SERVICES
TEST BANK, Chapter 9
Multiple Choice
Choose the best answer for each of the following questions:
1. A country where the taxpayer is a citizen or a legal resident is called the:
a. transaction country
b. native country
c. reporting country
d. worldwide country
Answer: b
Rationale:
The term "native country" refers to the country of citizenship or legal residency of the
taxpayer. This is where the taxpayer has citizenship or legal residency status, which typically
determines tax obligations.
2. A model under which a country imposes taxes on residents based on their worldwide
income, regardless of its source, is called a:
a. pure transaction model
b. foreign credit model
c. territorial model
d. none of the above.
Answer: d
Rationale:
The correct term for the described model is "worldwide model." It imposes taxes on residents
based on their worldwide income, regardless of its source.
3. A model under which a country imposes taxes only on incomes earned within its own
border is called a:
a. foreign income model.
b. worldwide model.
c. territorial model
d. blended model
e. none of the above.
Answer: c
Rationale:
The described model is known as a "territorial model." It imposes taxes only on incomes
earned within the country's borders.
4. Under its blended model, the U.S. taxes corporate income in the following way:
a. It imposes taxes on the worldwide income of domestic corporations and the income of
foreign entities that is connected with a U.S. business.
b. It imposes taxes on worldwide income of domestic corporations even if the income is not
brought back into the U.S.
c. It gives an unlimited foreign tax credit for the full amount of taxes paid to other countries.
d. All of the above.
Answer: a
Rationale:
Under the blended model, the U.S. taxes corporate income by imposing taxes on the
worldwide income of domestic corporations and the income of foreign entities that is
connected with a U.S. business.
5. Which of the following statements is CORRECT regarding the U.S. foreign tax credit?
a. The credit is unlimited and is allowed for the full amount of foreign taxes.
b. The credit is limited to the amount of U.S. taxes that would be due on the income.
c. The credit is only allowed for taxes paid in countries which have a tax treaty with the U.S.
d. None of the above statements is correct.
Answer: b
Rationale:
The correct statement regarding the U.S. foreign tax credit is that it is limited to the amount
of U.S. taxes that would be due on the income.
6. Most countries require a transfer pricing scheme that adheres to:
a. a territorial model.
b. safe harbor methods.
c. an arm’s length principle.
d. all of the above.
Answer: c
Rationale:
Transfer pricing schemes typically adhere to the arm's length principle, which ensures that
transactions between related entities are conducted as if they were unrelated parties, to
prevent tax avoidance.
7. The source determination of income is dependent on:
a. the amount of the taxpayer’s taxable income.
b. the taxpayer’s business or profession
c. performance location and/ or property location.
d. all of the above.
Answer: c
Rationale:
The source determination of income is typically dependent on factors such as the location of
performance or property, rather than the amount of taxable income or the taxpayer's business
or profession.
8. Which statement is INCORRECT regarding the sourcing of deductions in U.S.
international taxation?
a. Deductions and losses must be apportioned between domestic and foreign-source gross
income.
b. Definitely related deductions associated with more than one source must be apportioned.
c. Definitely related deductions are relatively simple to allocate.
d. All of the above statements are correct.
Answer: b
Rationale:
The statement that definitely related deductions associated with more than one source must
be apportioned is incorrect. Such deductions are not apportioned but are allocated to specific
sources.
9. Expenses that are either not attributable to any specific income source or are associated
with more than one source are known as:
a. U.S. source deductions.
b. apportioned deductions.
c. ‘not definitely related’ deductions.
d. none of the above.
Answer: c
Rationale:
Expenses that are not attributable to any specific income source or are associated with more
than one source are referred to as "not definitely related" deductions.
10. The OECD is an organization known for its:
a. belief in democratic governments and market economies.
b. support of tax havens.
c. publication of economic and social data and statistics.
d. only (a) and (c).
Answer: d
Rationale:
The OECD is known for its promotion of democratic governments and market economies, as
well as its publication of economic and social data and statistics. It does not support tax
havens.
11. Tax treaties can prevent double taxation by:
a. providing reduced tax rates and reduced withholding.
b. exempting certain types of income from taxation.
c. including a “savings clause.”
d. all of the above.
e. only (a) and (b).
Answer: e
Rationale:
Tax treaties aim to prevent double taxation by providing mechanisms such as reduced tax
rates and reduced withholding (option a) and exempting certain types of income from
taxation (option b).
12. The difference between the net earnings that a worker takes home at the end of the year
and what it costs to employ that worker (tracked by the OECD) is called:
a. average wages after taxes.
b. the tax wedge.
c. U.S. source income.
d. none of the above.
Answer: b
Rationale:
The term "tax wedge" refers to the difference between the total labor costs to the employer
and the net take-home pay of the employee after taxes and social security contributions. It is
tracked by the OECD.
13. BNA’s Premier International Tax Library includes:
a. an international create-a-chart feature.
b. CCH’s Tax Treaties Reporter.
c. Tax Notes International.
d. Tax Management Portfolios
Answer: d
Rationale:
BNA's Premier International Tax Library includes Tax Management Portfolios, which are
comprehensive resources covering various aspects of international taxation.
14. Which of the following statements describes the international tax services offered by
LexisNexis?
a. LexisNexis contains a Westlaw International Tab.
b. Only primary sources are available.
c. LexisNexis contains international publications by BNA, CCH, Wiley, and Tax Analysts.
d. All of the above statements accurately describe LexisNexis international tax services.
Answer: c
Rationale:
LexisNexis offers international tax services that include publications from various
authoritative sources such as BNA, CCH, Wiley, and Tax Analysts.
15. Tax Notes International is published by:
a. Westlaw
b. Tax Analysts
c. CCH
d. RIA
Answer: b
Rationale:
Tax Notes International is a publication of Tax Analysts, which provides in-depth analysis
and commentary on international tax issues.
16. The International Bureau of Fiscal Documentation (IBFD) is:
a. an independent agency which provides authoritative expertise to tax practitioners around
the globe with regard to cross-border taxation.
b. an association of countries that monitors world economics.
c. a website with links to numerous international tax web pages.
d. none of the above.
Answer: a
Rationale:
The IBFD is an independent agency that provides authoritative expertise to tax practitioners
worldwide on cross-border taxation matters.
17. The RIA tax product which provides a comprehensive set of analytical treaties and texts is
named:
a. RIA International Taxes Weekly
b. Tax Management Portfolios.
c. RIA International Tax Library (ITL)
d. Worldwide Tax Treaties.
Answer: c
Rationale:
The RIA tax product that provides a comprehensive set of analytical treaties and texts is
named the RIA International Tax Library (ITL).
18. English translations of tax and commercial law for approximately 90 countries are offered
through which service?
a. Worldwide Tax Treaties by Tax Analysts.
b. RIA Tax Advisors Planning System.
c. RIA’s Worldwide Tax Law (WTL).
d. CCH’s Global Transaction Library.
Answer: c
Rationale:
RIA's Worldwide Tax Law (WTL) offers English translations of tax and commercial law for
approximately 90 countries.
19. The International Tax Journal is published by:
a. Tax Analysts.
b. Westlaw.
c. CCH.
d. The OECD.
Answer: b
Rationale:
The International Tax Journal is published by Westlaw, providing insights and analysis on
international tax matters.
20. CCH International taxation materials include the:
a. Worldwide Tax Daily newsletter created in conjunction with Tax Analysts.
b. International Tax Planning Library.
c. Global Tax Center developed by LexisNexis
d. Foreign Income Library of the Tax Management Portfolios.
e. all of the above.
Answer: b
Rationale:
CCH International taxation materials include resources such as the International Tax Planning
Library, which provides comprehensive information and guidance on international tax
planning.
True or False
Indicate which of the following statements are true or false by circling the correct
answer.
1. A transaction country is a country where the taxpayer resides or an entity is located.
Answer: False
Rationale:
A transaction country is a country where the income is earned or the transaction is completed.
2. The ultimate goal of a corporate tax director in international tax planning is to reduce the
company’s overall global effective tax rate.
Answer: True
Rationale:
The primary objective of a corporate tax director in international tax planning is indeed to
minimize the company's overall global effective tax rate. This involves structuring the
company's operations and transactions in a tax-efficient manner, utilizing various strategies
such as transfer pricing, tax incentives, and optimizing the use of tax treaties to minimize tax
liabilities across different jurisdictions. By reducing the effective tax rate, the company can
enhance its competitiveness, increase profitability, and maximize shareholder value.
3. In practice, most of the countries in the world use a pure worldwide model of taxation.
Answer: False
Rationale:
In practice, no country uses a pure worldwide model of taxation.
4. With a territorial model of taxation, a foreign tax credit is needed to ensure that the income
is not taxed twice.
Answer: False
Rationale:
A foreign tax credit is not necessary under the territorial model. It is used in the worldwide
model to minimize double taxation.
5. The U.S. blended model encourages U.S. domestic corporations to retain earnings in
foreign countries and postpone repatriation as long as possible.
Answer: True
Rationale:
Under the U.S. blended model, domestic corporations are subject to taxes on their worldwide
income, but they receive credits for foreign taxes paid on income earned abroad. This system
can incentivize corporations to keep earnings in foreign countries and delay repatriation to
the United States, especially if the foreign tax rates are lower than the U.S. tax rate. By
retaining earnings overseas, corporations can potentially reduce their overall tax burden.
6. The transfer pricing rules target multinational companies that use the price-setting process
in intercompany transactions to report low taxable income in high-tax countries and high
taxable income in the low-tax countries.
Answer: True
Rationale:
Transfer pricing rules are designed to prevent multinational corporations from shifting profits
artificially to jurisdictions with lower tax rates, thereby reducing their overall tax liabilities.
Multinational companies may engage in transfer pricing practices by setting prices for
intercompany transactions in a manner that allocates more profits to subsidiaries located in
low-tax jurisdictions and fewer profits to those in high-tax jurisdictions. These rules aim to
ensure that transactions between related entities are conducted at arm's length prices,
reflecting fair market value, to accurately determine taxable income in each jurisdiction.
7. Generally, inventory sales are sourced by the location of the seller.
Answer: False
Rationale:
Generally, inventory sales are sourced by location of the transaction.
8. A native country’s taxation of its citizens’ foreign-source income involves inbound
transactions.
Answer: True
Rationale:
A native country’s taxation of its citizens’ foreign-source income involves outbound
transactions.
9. “Savings clauses” in U.S. treaties prevent U.S. residents from using treaty provisions to
avoid taxes on U.S. source income.
Answer: True
Rationale:
"Savings clauses" in U.S. tax treaties ensure that treaty benefits are not abused or used to
circumvent taxation on U.S. source income by U.S. residents. These clauses typically
stipulate that treaty benefits will not apply if they would result in the avoidance of U.S. tax on
income from U.S. sources.
10. U.S. tax law uses a territorial approach for taxing non-U.S. taxpayers.
Answer: True
Rationale:
In the context of non-U.S. taxpayers, the United States generally applies a territorial approach
to taxation. This means that non-U.S. taxpayers are typically subject to U.S. tax only on
income that is effectively connected with a U.S. trade or business or on certain U.S.-source
income, rather than on their worldwide income.
11. BNA offers Country Portfolios covering the taxation of business operations in specific
countries.
Answer: True
Rationale:
BNA provides Country Portfolios, which are comprehensive resources covering the taxation
of business operations in specific countries. These portfolios offer detailed information on the
tax laws, regulations, and practices relevant to conducting business in each respective
country, aiding companies and professionals in navigating international tax compliance and
planning.
12. Tax Notes International is a daily publication.
Answer: True
Rationale:
Tax Notes International is a weekly publication.
13. Originally, the IBFD was simply a document repository, but now it provides expert
research products.
Answer: True
Rationale:
Initially, the International Bureau of Fiscal Documentation (IBFD) primarily served as a
repository of tax-related documents and information. However, over time, it has evolved into
an organization that not only houses extensive tax-related documents but also provides expert
research products and services. These include publications, databases, training programs, and
advisory services, catering to the needs of tax professionals and organizations worldwide.
14. Westlaw offers the business primers, “Doing Business in…” for a variety of countries that
provide an overview of different countries’ tax environments.
Answer: False
Rationale:
Lexis offers the business primers, “Doing Business in…” for a variety of countries.
15. The Create-a-Chart, a special feature of RIA Checkpoint, develops personalized charts of
pertinent information for countries selected by the practitioner.
Answer: True
Rationale:
The Create-a-Chart feature of RIA Checkpoint indeed allows practitioners to generate
personalized charts containing relevant tax information for specific countries selected by the
user. This feature enables practitioners to quickly access and compare key tax data across
different jurisdictions, facilitating efficient tax planning and compliance efforts.
16. Westlaw offers one portal to international taxation materials, through the standard
service, Westlaw Taxation.
Answer: False
Rationale:
Westlaw offers two portals to international taxation materials: through a separate service,
Westlaw International, and through the standard Westlaw subscription.
17. U.S.-adopted tax treaties usually do not address state and local tax issues.
Answer: True
Rationale:
U.S.-adopted tax treaties primarily focus on issues related to federal taxation and
international tax matters between the United States and treaty partner countries. State and
local tax issues fall under the jurisdiction of individual states within the U.S. and are
generally not addressed in these treaties. As a result, tax treaties negotiated and adopted by
the U.S. typically do not include provisions pertaining to state and local taxes.
18. The newsletter, International Taxes Weekly, is published by Westlaw.
Answer: False
Rationale:
The newsletter, International Taxes Weekly, is published by RIA.
19. CCH offers the International Tax Planning Library.
Answer: True
Rationale:
CCH indeed provides the International Tax Planning Library, which serves as a
comprehensive resource for tax professionals and businesses engaged in international tax
planning. This library contains essential guidance, analysis, and tools to navigate the
complexities of international taxation, aiding practitioners in developing effective tax
strategies and ensuring compliance with global tax laws and regulations.
20. Worldwide Tax Rates and Answers, a service of CCH, provides corporate tax rates by
country, including national and local tax rates, as well as current forms and instructions for
countries around the world.
Answer: True
Rationale:
CCH's Worldwide Tax Rates and Answers service offers valuable information on corporate
tax rates across various countries, including both national and local tax rates. Additionally, it
provides access to current forms and instructions required for tax compliance in jurisdictions
worldwide. This resource enables tax professionals and businesses to stay informed about tax
obligations and requirements in different countries, facilitating effective tax planning and
compliance efforts.
Short Answer:
1. How is the source of income determined for the purpose of taxation? Briefly identify the
sourcing rules for the following types of income: dividends, services, sales of inventory and
income from property.
Answer: Source determinations govern which country should properly be taxing income. The
source determination of income is dependent on performance location and/or property
location. Income from interest and dividends generally is sourced by the residency of the
payor. Thus, dividends from a U.S. domestic corporation and interest from a state bond are
sourced within the United States. However, to attract foreign investment, the U.S. allows a
tax exemption on interest paid from a U.S. bank to a nonresident. For income from property,
such as rents, royalties, or gains from property sales, it is the location of the property that is
relevant. Sales of inventory often are sourced by the location of the transaction, not by the
origin of the inventory. Thus, inventory purchased in a foreign country but sold within the
United States produces domestic sourced income. Income for personal services usually is
sourced according to where the services are performed, not the residency of the compensating
entity or the citizenship of the personal service provider.
2. Distinguish between ‘definitely related deductions’ and ‘not definitely related’ deductions.
Answer: Deductions for expenses and losses directly related to a transaction or activity are
called ‘definitely related’ deductions and are relatively simple to allocate. For example, cost
of goods sold is allocated to the sales income to which it relates. Expenses that are either not
attributable to any specific income source or are associated with more than one source are
known as ‘not definitely related’ deductions and must be apportioned. Typically, these
expenses are grouped by class of gross income and then apportioned between foreign and
U.S. sourced income.
3. Briefly explain the U.S. blended model of international taxation and the purpose of the
foreign tax credit.
Answer: The United States uses a blended model of international taxation that follows the
worldwide model for taxing its citizens and the territorial approach for taxing non-U.S.
taxpayers. For instance, the U.S. taxes the worldwide income of domestic corporations and
the income of foreign entities that is connected with U.S. business. However, U.S. tax is not
collected from foreign subsidiaries of U.S. companies until it is brought back into the United
States. Because the U.S. taxes its companies’ worldwide income that may be subject to tax in
foreign jurisdictions, the U.S. allows a foreign tax credit for taxes paid to other countries.
However, the credit cannot exceed the amount of U.S. taxes that would have been due on the
income. Under the territorial part of the model, the U.S. taxes non-U.S. taxpayers only on
income earned within the United States.
4. “The Code provisions always take precedence over treaty provisions.” Comment.
Answer: Sometimes, the Code and tax treaties may provide conflicting treatment of some
types of foreign sourced income. Unlike most countries, in the United States, treaty
provisions do not take precedence over the Code. Instead, efforts are made, to the extent
possible, to apply these provisions in harmony with each other if a treaty provision and a
Code provision are in conflict. If this is not possible, then the most recently issued provision
generally prevails.
Essay Question
1. Discuss the variety of international products offered by RIA.
Answer: RIA offers a variety of international products that may be bundled with RIA
Checkpoint to meet the particular needs of each practitioner’s international research. In the
International Practice Area, primary international law and treaties are supplied along with
editorial materials by various authors and sources.
The RIA Worldwide Tax Law (WTL) service is one of the most comprehensive services in
the International Practice Area. It offers English translations of tax and commercial laws for
approximately ninety countries. Similar to the search methodology used for the State & Local
Checkpoint service, WTL requires the researcher to select one of eight broad geographical
areas and at least one specific country, then the type of documents desired before a keyword
search is performed.
Another useful service accessible through Checkpoint is the RIA International Tax Library
(ITL). The ITL is a comprehensive set of analytical treatises and texts. A U.S. bilateral tax
treaty database is included for accessing primary sources. Newsletters and journals are
included to keep the practitioner up-to-date on global taxation.
RIA offers International Portfolios, called the RIA Tax Advisors Planning System, that are
written by expert practitioners who are currently in practice. These portfolios, updated
monthly, focus on specific issues relevant to taxpayers with international business. Each
portfolio includes commentary, advice supported by detailed explanations, integrated
planning ideas, and the current rules with citations to the controlling authorities. In addition,
practice aids are included.
All international subscriptions receive the RIA International Taxes Weekly. This is a weekly
e-newsletter that covers current developments and emerging issues related to international
taxation and is similar to the newsletter delivered with subscriptions to the regular Federal
RIA Checkpoint.
Checkpoint also offers the unique RIA International Create-a-Chart function that facilitates
creating tax comparison charts with links to controlling authority, detailed explanations, and
analysis by WG&L treatises. These links are maintained when the chart is exported to a word
processing file. The Create-a-Chart feature allows a practitioner to develop personalized
charts of comparative information for countries selected by the practitioner. There are
currently over 75 chart types offered in Create-a-Chart on topics such as alimony, air and ship
transport, capital gains, dividends, charitable contributions, and pensions.
2. Discuss in brief about some of the most useful resources offered within the CCH
International Tax Service.
Answer: CCH offers numerous international tax products that provide primary documents
combined with authoritative analyses written by experts in the field. To provide these
products, CCH has teamed up with other publishers and outside authors. The following
products are some of the most useful resources offered within the CCH International Tax
Service.
Worldwide Tax Rates and Answers: This service provides corporate tax rates by country,
including national and local tax rates, as well as current forms and instructions for countries
around the world.
Global Transaction Library: This series of publications is designed to provide guidance on tax
planning and compliance for cross-border and international transactions by taking a
transactional approach. This service includes the following publications: Tax Notes
International, International Taxation: Corporate and Individual, the Transfer Pricing Library,
which provides four authoritative works on transfer pricing focusing on U.S. transfer pricing
laws and international transfer pricing laws, and International Transfer Pricing Laws: Text
and Commentary, which provides coverage of transfer pricing for more than 30 countries.
International Tax Planning Library: This library consists of three comprehensive publications
and a practical newsletter exploring tax-planning issues from around the world. The three
publications cover international tax planning for corporations, expatriates, and migrants, and
offshore financial centers, for more than 40 countries.
International Tax Treaty Expert Library: Thousands of treaties (with amended language in
context) and related documents, such as diplomatic notes and protocols, are available, and all
are in English. The treaties cover income, estate and gift taxes, sea and air transport, and
information exchange agreements. Some of the analytical works included in the service are
Klaus Vogel on Double Taxation Conventions; International Taxation, U.S. Taxation of
Foreign Persons & Foreign Income; The Compatibility of Anti-Abuse Provisions in Tax
Treaties with EC Law; The Impact of Community Law on Tax Treaties—Issues and
Solutions; and The 1996 United States Model Income Tax Convention, Analysis,
Commentary and Comparison.
Test Bank for Federal Tax Research
Roby B. Sawyers, Steven Gill, Debra Sanders, William A. Raabe, Gerald E. Whittenburg
9781111221645, 9781337282987, 9781285439396
