#10 International Taxation Quiz

How do you decide the international location of a business?

Based on after-tax profit and cash flows

What are the two forms of operation?

Branch or subsidiary

What are the two methods of financing?

Capital contributions (equity) or debt

What are the three factors to consider when deciding an international business?

1. Where to locate foreign operation

2. What legal form should foreign operation take

3. How the foreign operation will be financed

What are corporate income taxes?

A tax imposed on company profits, varying widely across countries
Imposed by governments

What is the typical global corporate tax rate range?

roughly 15 and 35 %

What are withholding taxes?

Taxes on payments (dividends, interest, royalties) to foreign entities

What is a tax holiday?

Low to zero taxes for a PERIOD OF TIME

encourages foreign direct investment

Usually have requirement regarding amount of investment and/or number of jobs created

What is tax haven?

A country with abnormally low corporate income tax rates or no corporate income tax at all

Ex: Bahamas and the Isle of Monaco (have no corporate income tax)

Ex: Ireland and Netherlands (low income taxes)

What is the worldwide (nationality) tax approach?

Tax on all income of resident, company of a country, and regardless of place of earning

Could lead to double taxation

What is the territorial tax approach

Tax ONLY ON income earned in that country

Helps prevent double taxation

What are three basis for taxation?

1. Source

2. Citizenship

3. Residence

What is double taxation?

The same income taxed in foreign source country and country of residence
Discourages foreign investment

How do U.S. taxes work for a foreign branch?

U.S. Residence: include income in U.S. parent

How do U.S. taxes work for a foreign subsidiary?

Not U.S. resident, so no U.S. tax

What is a foreign tax deduction?

deduct ALL foreign taxes paid on related foreign income

What is a foreign tax credit?

credit for foreign income taxes on foreign income
Credit allowed for withholding tax on dividends
No credit allowed for sales, VAT, or excise tax

What is thin capitalization?

Financing with more debt than equity to reduce taxes.

What is a branch?

A foreign operation not legally separate from the parent company.

Right to do business in a country

How is branch income taxed (U.S.)?

Included immediately in the parent’s taxable income

considered a resident and the branch income is include on the parent’s tax return

Foreign tax credit is allowed for foreign taxes paid by the branch

What is a subsidiary?

A legally separate foreign entity.

How is subsidiary income taxed (U.S.)?

not considered a resident and income is not included on the parent’s tax return until the income is repatriated back to the United States

Based on the tax treaty between countries, the repatriation will be subject to a withholding tax and will be eligible for a foreign tax credit

If foreign tax rate > U.S. rate then..

No, U.S. tax owed ; excess credits may carry forward

If foreign tax rate < U.S. rate then …

You pay the difference to the U.S.

What are the three ways to avoid double taxation?

1. Foreign tax credit

2. Tax deduction ( you deduct foreign taxes paid)

3. Tax treaties (reduce withholding taxes)