45 Questions
What is the term used to describe the criteria chosen by a government to assert its right to tax a person or transaction?
Nexus
Which type of income is taxed on a gross basis through a flat withholding tax?
Fixed, Determinable, Annual, or Periodical Gains, Profits, and Income
What is the primary jurisdiction of the United States in terms of taxing its citizens and residents?
U.S. Source Income
What is the tax rate applied to Effectively Connected Income (ECI) earned by a nonresident?
21%
What is the term used to describe the taxation of a person's income in multiple countries, resulting in a higher overall tax burden?
Double Taxation
What is the primary approach used by the United States to tax the income of its citizens and residents?
Worldwide approach
What is the main purpose of the foreign tax credit limitation in the U.S. tax system?
To prevent double taxation of foreign-source income
Which of the following is a consequence of the Tax Cuts and Jobs Act (2017) for U.S. corporations with 10% or more foreign ownership?
A territorial approach for foreign-source income
What is the purpose of the Global Intangible Low-Taxed Income (GILTI) provision in the U.S. tax code?
To prevent income earned in excess of a 'normal rate of return' from being excluded from income
Which of the following is a characteristic of the U.S. tax residency rules?
Tax residency is determined by citizenship
What is the primary purpose of the foreign tax credit system in the U.S.?
To mitigate the double taxation of foreign source income earned by a U.S. person
According to the U.S.-Belgium treaty, what is the determining factor in deciding the tax residency of an individual like Lars?
Country of permanent home
What is the limitation of the foreign tax credit in the U.S. tax system?
The credit is limited to the U.S. tax that would be paid had the income been earned in the U.S.
What is the purpose of the 'closer connection' test in determining tax residency?
To determine the country to which the individual has a closer connection
What is the outcome of the 31-day test for Lars in 2022?
Lars meets the 31-day test in 2022
Under what basis is interest expense allocated to all gross income?
Assets that generated such income
What is the primary purpose of treaties in cross-border transactions?
To encourage cross-border trade by reducing double taxation
What type of taxes can be claimed as a credit on a U.S. tax return?
Only income taxes
What is the result of treaties on withholding tax imposed on cross-border payments?
Treaties reduce or eliminate the withholding tax on cross-border payments
What is the purpose of nexus rules in treaties?
To define when a resident of one country has nexus in the other country
What is the duration of stay in the United States required for a noncitizen to be considered a resident alien for income tax purposes under the physical presence test?
At least 31 days in the current year and a total of 183 days in the current year and preceding two years
What is the primary limitation on the current-year foreign tax credit in each category of foreign source income?
The FTC limitation in each category
A noncitizen is considered a U.S. resident alien for income tax purposes if they meet which of the following conditions?
Meet the physical presence test or hold a green card
Lars, a citizen of Belgium, stays in the United States for 90 days in 2022. Based on the given information, will Lars satisfy the substantial presence test in 2022?
No, because he did not meet the 183-day test in 2022
What type of income is typically included in the passive category for foreign tax credit purposes?
Interest, dividends, and royalties
What is the term for income earned through unincorporated business enterprises outside the United States?
Foreign branch company income
What is the purpose of the substantial presence test in the United States'
To determine whether a noncitizen is a U.S. resident alien for income tax purposes
Which of the following statements is true about the physical presence test?
It requires a noncitizen to be physically present in the United States for at least 31 days in the current year
Why is the foreign tax credit mechanism important in international taxation?
To prevent double taxation
What is the result of a U.S. company's foreign tax credit exceeding the FTC limitation in a particular category?
The excess credit is lost forever
What determines the source of interest income according to the U.S. source rules for gross income?
The residence of the borrower at the time the interest is paid
Why is interest income paid by a U.S. bank to a nonresident exempt from U.S. withholding or other income taxation?
To attract foreign capital to U.S. banks
What determines the source of dividend income according to the U.S. source rules for gross income?
The residence of the corporation paying the dividend
What type of income is included in compensation for 'labor and personal services'?
Income earned by employees, independent contractors, artists, entertainers, and athletes
What is the purpose of the source rules in determining gross income?
To determine what income is subject to U.S. taxation
What is the residence of the borrower significant for in determining the source of interest income?
At the time the interest is paid
Why is the source of income important in multinational transactions?
To determine the tax jurisdiction that has taxing authority
What is the result of applying the source rules to income earned by a non-U.S. taxpayer?
The income is subject to U.S. taxation
What is the purpose of the exception for interest income paid by a U.S. bank to a nonresident?
To attract foreign capital to U.S. banks
What is the relationship between the source rules and the imposition of tax liability?
The source rules determine what income is subject to U.S. taxation
A U.S. company's foreign tax credit can be claimed in a particular category without limitation if the credit does not exceed the FTC limitation.
False
Foreign branch company income is typically included in the passive category for foreign tax credit purposes.
False
Only income taxes paid to a foreign country can be claimed as a credit on a U.S. tax return.
True
The foreign tax credit mechanism is only applicable to income earned in countries that have a tax treaty with the United States.
False
The foreign tax credit limitation is calculated separately for each of the nine categories of foreign source income.
True
Test your understanding of the US framework for taxing multinational transactions, including the foreign tax credit limitation, source rules for income and deductions, and income tax treaties. This chapter 13 quiz covers key concepts in taxation of business entities.
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