ACCA Taxation Principles and Regulations 4 — Questions and Answers
Question 1: A US corporation receives a $100,000 dividend from a 15%-owned foreign corporation. Under the TCJA, what is the dividends received deduction (DRD) percentage available?
- 50%
- 65% (Correct answer)
- 100%
- 0%
Correct answer: 65%
A 65% DRD applies to dividends from corporations in which the taxpayer owns at least 20% but less than 80% of stock; for less than 20% ownership, the DRD is 50%.
Question 2: Under the ACCA syllabus, what is the key difference between tax evasion and tax avoidance?
- Tax evasion is legal; tax avoidance is illegal
- Tax avoidance is illegal concealment; tax evasion uses legal loopholes
- Tax evasion is illegal concealment of tax liability; tax avoidance is legal reduction of tax liability (Correct answer)
- There is no meaningful legal distinction between the two concepts
Correct answer: Tax evasion is illegal concealment of tax liability; tax avoidance is legal reduction of tax liability
Tax evasion involves illegal concealment or misrepresentation of income or assets, while tax avoidance involves legally reducing tax liability by exploiting provisions within the law.
Question 3: Under OECD BEPS Action Plan 13, what three-tiered documentation approach is required for multinational enterprises?
- Country-by-Country Report, Master File, and Local File (Correct answer)
- Transfer Pricing Study, Related-Party Disclosure, and Advance Pricing Agreement
- Intercompany Agreement, Benchmarking Study, and Functional Analysis
- Financial Statements, Tax Returns, and Audit Trail Documentation
Correct answer: Country-by-Country Report, Master File, and Local File
BEPS Action 13 requires a Country-by-Country Report (CbCR), a Master File with group-level information, and a Local File with entity-specific transfer pricing documentation.
Question 4: Which of the following describes the 'economic substance' requirement for business entities in offshore jurisdictions?
- Entities must pay the same tax as onshore companies
- Entities must have real employees, premises, and management decision-making in the jurisdiction (Correct answer)
- Entities must list their shares on a recognized stock exchange
- Entities must file financial statements with the OECD
Correct answer: Entities must have real employees, premises, and management decision-making in the jurisdiction
Economic substance requirements mandate that entities claiming tax residence in a jurisdiction have genuine employees, adequate expenditure, physical premises, and core income-generating activities there.
Question 5: A self-employed individual has net self-employment income of $100,000. What is the deductible portion of self-employment tax for income tax purposes?
- The full SE tax paid
- One-half of the SE tax paid (Correct answer)
- None; SE tax is not deductible
- SE tax is deductible only if itemizing deductions
Correct answer: One-half of the SE tax paid
Self-employed individuals may deduct one-half of their self-employment tax as an above-the-line deduction to reflect the employer's share of FICA taxes.
Question 6: In the context of VAT/GST, what is the 'destination principle'?
- Tax is levied in the country where goods are produced
- Tax is levied in the country where goods or services are consumed (Correct answer)
- Tax is levied based on where the supplier is registered
- Tax is levied on all cross-border transactions at the same rate
Correct answer: Tax is levied in the country where goods or services are consumed
The destination principle taxes goods and services where they are consumed, making exports zero-rated and imports taxable in the consuming country.
Question 7: Under the US check-the-box regulations, which entity type CANNOT elect its tax classification?
- Single-member LLC
- Multi-member LLC
- General partnership
- A corporation incorporated under state law (Correct answer)
Correct answer: A corporation incorporated under state law
Per se corporations, including entities incorporated under state corporation statutes, cannot elect a different tax classification and must be taxed as corporations.
ACCA Taxation Principles and Regulations 4
A US corporation receives a $100,000 dividend from a 15%-owned foreign corporation.
Under the TCJA, what is the dividends received deduction (DRD) percentage available?