Question 26. (LO 4) Why does the United States use a “basket” approach in the foreign tax credit limitation computation? 27. (LO 4) True or False. All dividend income received by a U.S.

26. (LO 4) Why does the United States use a “basket” approach in the foreign tax credit limitation computation?

27. (LO 4) True or False. All dividend income received by a U.S. taxpayer is classified as passive category income for foreign tax credit limitation purposes. Explain.

28. (LO 4) True or False. All foreign taxes are creditable for U.S. tax purposes. Explain.

29. (LO 4) What is an indirect credit for foreign tax credit purposes? What is the tax policy reason for allowing such a credit?

30. (LO 4) What is a functional currency? What role does it play in the computation of an indirect credit for foreign tax credit purposes?

31. (LO 5) What is a hybrid entity for U.S. tax purposes? Why is a hybrid entity a popular organizational form for a U.S. company expanding its international operations? What are the potential drawbacks to using a hybrid entity?

32. (LO 5) What is a “per se” entity under the check-the-box rules?

33. (LO 6) What are the requirements for a foreign corporation to be a controlled foreign corporation for U.S. tax purposes?

34. (LO 6) Why does the United States not allow deferral on all foreign source income earned by a controlled foreign corporation?

35. (LO 6) True or False. A foreign corporation owned equally by 11 U.S. individuals can never be a controlled foreign corporation? Explain.

36. (LO 6) What isforeign base company sales income? Why does the United States include this income in its definition of subpart F income?

37. (LO 6) True or False. Subpart F income is always treated as a deemed dividend to the U.S. shareholders of a controlled foreign corporation. Explain.

38. (LO 6) True or False. Non-subpart F income always qualifies for tax deferral until it is repatriated back to the United States. Explain.

PROBLEMS

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.

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?

b. Assume the United States allows U.S. corporations to exclude foreign source income from U.S. taxation. What would be the total tax 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?

d. Assume the United States allows U.S. corporations to claim a credit for foreign income taxes paid on foreign source income. What would be the total tax on the $2 million of branch profits? What would be your answer if Spartania taxed branch profits at 40%?

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