Reference no: EM131198201

Question 1:

Assume that the aggregate worldwide income of U.S. corporations is $850 billion (annually), of which $650 billion is subject to the U.S. corporate income tax. Further assume that the average tax rate imposed on this income is 34 percent.

Many policy makers believe that much of U.S. multinationals' (MNCs') foreign income would be "re-shored" to the U.S. if our corporate tax rate were lower. There is little consensus on how sensitive the tax base would be to a reduction in the tax rate, but for purposes of this problem assume that we project that a reduction in the corporate tax rate to 25 percent would increase the corporate tax base by $100 billion (i.e., half of "offshore" income would be "re-shored."

Based on that assumption, what would be the estimated direct revenue impact of a reduction of this magnitude in the U.S. corporate income tax rate? (Note: your answer should be submitted in billions, using a minus sign to denote a negative estimated impact-for example, if you estimate that the change in tax rates would reduce federal corporate tax revenue by $11.5 billion, your answer should be formatted as -11.5).

Question 2
Assume the same facts as in question 1. Further assume that a secondary (i.e., indirect) result of the increased corporate tax base would be an increase in corporate dividend payouts. By how much would dividends (to taxable investors) have to increase to make up for the revenue shortfall? Assume a 20% dividend tax rate, and format your answer as described in part a. (i.e., 11.5).

Question 3
Of course, the "re-shoring" of corporate profits would also increase other kinds of taxable payments to individuals (e.g., salaries and wages). Which of the following statements is least plausible regarding the effect of these secondary payments?

a. Salaries and wages that were previously paid to individuals in other countries with respect to "re-shored" profits will generate additional tax revenues from the individual income tax and associated payroll and employment taxes (e.g., Social Security, Medicare, etc.). Thus, the static estimate of lost corporate tax revenues will be partially offset by increases in individual taxes.

b. If individuals consume the majority of increased salaries and wages received, the "multiplier" effect of this increased consumption will increase the overall corporate income tax base in the U.S.

c. Effect "b" above will be incremental to the impact of effect "a" above.

d. The impact of effect "b" above is likely to be so small as to be insignificant.

Question 4
Q Corporation has reinvested $100 billion of foreign earnings in its Irish operations. Due to a change in economic conditions, its pre-tax Irish ROA has declined to 5 percent. It estimates that it would have to pay $25 billion in U.S. tax to repatriate all of these earnings and profits to the U.S. What pre-tax return would the company need to earn in the U.S. to break even, after tax, on repatriation of its Irish E&P? (Assume an Irish tax rate of 12.5% and a U.S. tax rate of 35%). Round your answer to 2 decimals and do not use the % sign. Note: answering this question requires a complex analysis-take your time.

Question 5
Bear Lake Inc. earned $150 million in Country M, and paid $30 million in Country M income taxes. The company's structure does not allow deferral of the U.S. income tax on its Country M income.

If it deducts the Country M income tax for purposes of computing its U.S. tax liability, how much U.S. income tax will Bear Lake owe on its Country M income? (Assume a 35% U.S. income tax rate). Your answer should not include the dollar sign, and should be rounded to the nearest dollar. Use commas to separate zeroes--e.g., 10,000,000.

Question 6
In question 5 above, what will be the effective tax rate on Bear Lake's Country M income (counting both Country M and U.S. income taxes)? In formatting your answer, do not use the percent sign--input your answer as a decimal (e.g., .15).

Question 7
JDR Inc. has $100 million invested in country Z, which taxes corporate income at 20%. The investment in country Z generates a 7.5 percent return before tax and 6 percent after. JDR's home country imposes a 35 percent tax rate. What return would the company need to be able to generate before tax in its home country in order to earn the same after-tax return that it earns in country Z? (round your answer to 2 decimals and do not use the percent sign-e.g., 6.55)

Question 8
McGonigal Inc. is a U.S. drug manufacturer selling prescription drugs in a global market. It has a foreign subsidiary through which it distributes its product to its non-U.S. market. McGonigal's U.S. tax rate is 35%. Its subsidiary is located in a country with a corporate tax rate of 12.5%.

For next year, McGonigal projects foreign sales (through the foreign sub) will be $500 million. The cost of goods manufactured with respect to these foreign sales will be $100 million. The company normally sells drugs to its distributors at 150% markup over cost. It is evaluating an economic argument to justify only a 50% markup for sales to its foreign distribution subsidiary. Assume that no U.S. tax will be due on profits earned by the foreign sub. How much tax expense will McGonigal save if it changes its transfer price with respect to sales to the foreign sub? (Assume that title to drugs sold to the foreign distributor passes in the U.S.)

Question 9
Assume that USMNC has 10% of its Plant, Property and Equipment, 50% of its sales, and 30% of its payroll in the U.S., with the remainder in European Country J. The U.S. has converted to a territorial tax system and joined the world in implanting a formulary apportionment approach to sourcing corporate income. The U.S. tax rate is 35% and Country J's tax rate is 20%.

The U.S. uses an equal-weighted 3-factor formula, which means that it claims jurisdiction over 30% of USMNC's income [(10% + 50% + 30%)/3]. Country J, in contrast, "double weights" sales (i.e., its apportionment formula weights sales at 50% and PPE and payroll at 25% each, rather than weighting each factor at 33% as in the U.S.). USMNC has worldwide net income of $800 million.

How much of USMNC's worldwide income will be taxed in Country J?

Question 10
In question 9 above, how did double-weighting sales in Country J's apportionment formula affect the portion of USMNC's income that is taxable in Country J, and how did it affect USMNC's total (worldwide) tax liability?

a. Increased the portion of income taxed in Country J and decreased USMNC's total worldwide tax liability.
b. Decreased the portion of income taxed in Country J and decreased USMNC's total worldwide tax liability.
c. Increased the portion of income taxed in Country J and increased USMNC's total worldwide tax liability.
d. Decreased the portion of income taxed in Country J and increased USMNC's total worldwide tax liability.