FCCA Taxation and Compliance Flashcards

Which of the following is a key difference between tax avoidance and tax evasion?

Answer: Tax avoidance uses legal means to reduce tax; tax evasion involves illegal concealment of income or assets

Tax avoidance involves legal tax planning to minimize liability within the law, while tax evasion is the illegal act of deliberately misrepresenting or concealing information to reduce tax.

Under OECD BEPS (Base Erosion and Profit Shifting) Action Plans, what is the primary concern addressed?

Answer: Preventing multinational companies from shifting profits to avoid taxes using mismatches and gaps

BEPS addresses strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations, eroding the tax base of higher-tax countries.

A US company pays foreign income taxes on profits earned abroad. Which US tax provision prevents double taxation of that income?

Answer: Foreign tax credit (IRC Section 901)

The foreign tax credit under IRC Section 901 allows US companies to offset their US tax liability by the amount of income taxes paid to foreign governments on the same income.

In US state and local taxation, what concept determines how much of a multistate corporation's income is subject to tax in each state?

Answer: Apportionment using a formula based on sales, payroll, and/or property factors

States use apportionment formulas — historically three-factor (sales, payroll, property) but increasingly single-sales factor — to allocate a portion of a multistate corporation's income to each state for taxation.

Which US tax form is used by S-corporations to file their annual federal income tax return?

Answer: Form 1120-S

S-corporations file Form 1120-S (US Income Tax Return for an S Corporation), passing through income, deductions, and credits to shareholders via Schedule K-1.

Under US tax law, the IRS 'substance over form' doctrine is used for which purpose?

Answer: To look through the legal form of transactions and tax them based on their economic substance

The substance over form doctrine allows the IRS to recharacterize transactions based on their economic reality rather than their legal form, preventing tax benefits from purely technical arrangements with no business purpose.