Tax Planning & Compliance Flashcards

A multinational company establishes a subsidiary in a low-tax jurisdiction primarily to hold intellectual property. Which OECD initiative specifically targets this practice?

Answer: BEPS — Base Erosion and Profit Shifting Action Plan

The OECD's BEPS project addresses strategies that exploit gaps in tax rules to artificially shift profits to low-tax jurisdictions, including IP holding structures.

What is the primary function of Form 8-K as it relates to tax and financial disclosures for public companies?

Answer: Current report filed to disclose material events, including significant tax developments

Form 8-K is filed with the SEC to report material corporate events on a current basis, which can include material tax settlements, IRS rulings, or significant changes in tax estimates.

A business receives a sales tax audit notice from a state revenue department. Which document most directly establishes the company's obligation to collect and remit sales tax in that state?

Answer: Nexus — a sufficient connection to the state based on economic or physical presence

Sales tax nexus — the threshold connection to a state — determines whether a business is legally required to collect and remit that state's sales tax, especially after South Dakota v. Wayfair (2018).

Under the Tax Cuts and Jobs Act (TCJA) of 2017, what limitation was placed on the deductibility of net interest expense for businesses with gross receipts over $26 million?

Answer: Net interest expense deductible only up to 30% of adjusted taxable income (ATI)

TCJA Section 163(j) limits business interest expense deductions to 30% of adjusted taxable income, with disallowed amounts carried forward to future years.

A company wants to communicate clearly about its tax strategy in its sustainability/ESG report. What does 'tax transparency' most commonly mean in this context?

Answer: Voluntarily disclosing the approach to tax planning, effective tax rates, and amounts paid by jurisdiction

Tax transparency in ESG reporting refers to voluntary disclosure of tax governance policies, country-by-country payment data, and effective tax rates to demonstrate responsible tax behavior.

Which penalty does the IRS impose when a taxpayer substantially understates income — defined as an understatement exceeding 10% of the correct tax or $5,000, whichever is greater?

Answer: 20% accuracy-related penalty

IRC Section 6662 imposes a 20% accuracy-related penalty on the portion of underpayment attributable to substantial understatements of income tax.

A startup receives $500,000 in venture capital funding. How is this capital contribution treated for federal income tax purposes at the time of receipt?

Answer: Not taxable income — it is a contribution to capital that increases stock basis

Capital contributions from investors are not taxable income to the recipient entity; they increase the company's paid-in capital and the investors' basis in their stock.