Corporate Tax 2010 - BMR Advisors

Cravath, Swaine & Moore LLP
USA
above do not apply to corporations with debt to equity ratios of less
than 1.5 to 1. The limitations on corporate acquisition indebtedness
described above do not apply to corporations with debt to equity
ratios of less than 2 to 1.
3.6 Would any such “thin capitalisation” rules extend to debt
advanced by a third party but guaranteed by a parent
company
If a foreign parent guarantees third-party debt of a thinly capitalised
U.S. subsidiary, the IRS may assert that in substance the loan was
actually made to the foreign parent and that the foreign parent
advanced the funds to its U.S. subsidiary as an equity contribution.
In this situation, any payments by the U.S. subsidiary to the thirdparty
lender would be recharacterised as dividends to the foreign
parent. Additionally, a guarantee by a foreign parent may trigger
application of the earnings stripping rules discussed in question 3.4
even though the lender is unrelated to the U.S. subsidiary.
3.7 Are there any restrictions on tax relief for interest
payments by a local company to a non-resident in addition
to any thin capitalisation rules mentioned in questions
3.4-3.6 above
Other than the restrictions on the portfolio interest exemption
discussed in question 3.3, there generally are no other restrictions
on tax relief for interest payments by a local company to a nonresident.
3.8 Does the United States have transfer pricing rules
Yes. U.S. transfer pricing rules allow the IRS to apportion income,
deductions, credits, or allowances from cross-border transactions
among related entities if it determines that such apportionment is
necessary in order to prevent evasion of taxes or to reflect income
clearly. These rules may apply to transfers of services, tangible
property or intangible property. Large multinational companies
with significant operations in the U.S. often engage experts to
review their transfer price arrangements to ensure compliance with
U.S. law.
4.3 What is the tax base for that tax (profits pursuant to
commercial accounts subject to adjustments; other tax
base)
The United States has a parallel but separate system of tax
accounting for determining a corporation’s tax base that is distinct
from other regimes that may apply for commercial, financial or
statutory purposes. This system is set out in the Internal Revenue
Code. Under this system, a corporation must first calculate its gross
income, which includes income from services, sales of inventory
(minus cost of goods sold), dividends, royalties, interest, rent and
other income. Gross income also includes capital gains from sales
of property. From gross income, a corporation computes its taxable
income by subtracting various deductions for costs incurred in its
business such as wages, depreciation, rents, interest and other
ordinary and necessary business expenses.
4.4 If it otherwise differs from the profit shown in commercial
accounts, what are the main other differences
Although United States generally accepted accounting principles,
referred to as GAAP, and tax accounting are similar in many respects,
they differ in a few important ways. GAAP generally polices a
reporting company’s incentive to accelerate revenue and defer
expenses, while tax accounting polices a company’s incentive to defer
income and accelerate expenses. In many cases, differences between
the two systems can be traced to these competing biases.
GAAP and tax accounting differ, for example, in the treatment of
prepaid or contingent income and expenses. Under GAAP, income
is recognised over the period to which it relates, and if a payment is
received before it is earned it is held in suspense as deferred
revenue. For tax purposes, income is generally recognised upon the
earlier of the date of receipt or the date on which it is earned.
GAAP recognises expenses in the period to which such expenses
are economically attributable and often provides for the recognition
of unpaid estimated expenses through reserves. By contrast, for tax
purposes business expenses cannot be deducted until the amount
can be determined with reasonable accuracy, all events have
occurred that fix the fact of the liability and economic performance
has occurred. As a result, reserves for estimated expenses are
generally not deductible in computing taxable income.
USA
4 Tax on Business Operations: General
4.1 What is the headline rate of tax on corporate profits
The top federal tax rate for corporations is 35%. Most states and
some local governments also impose income or similar taxes on
corporate earnings.
4.2 When is that tax generally payable
A corporation’s tax year must match the annual period it uses for its
commercial books and records, which can either be a calendar year
or a fiscal year. Estimated tax payments are due quarterly. A
corporation’s final tax return and the payment of its remaining tax
liability is due on the 15th day of the 3rd month after the end of its
tax year (March 15 for a calendar year corporation), although a 6-
month extension is available with interest on any unpaid tax
liability.
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4.5 Are there any tax grouping rules Do these allow for relief
in the United States for losses of overseas subsidiaries
Yes. In the United States, corporate members of an “affiliated group”
may, and almost always do, elect to file a consolidated Federal income
tax return. An affiliated group is one or more chains of U.S.
corporations where a common parent corporation owns at least 80%
of the stock (by vote and value) of another “includible corporation”,
and one or more “includible corporations” (including the common
parent) own at least 80% of the stock of the next lower tier of
“includible corporations”. Generally speaking, the consolidated
return regime taxes affiliated corporations as if they were a single
taxpayer with respect to transactions with third parties. This provides
affiliated groups with the benefit of being able to use losses from one
affiliate to offset the income of another affiliate. Income and losses on
transactions between affiliates, however, are generally deferred under
complex rules until realised in a transaction outside of the group.
Non-U.S. companies, tax-exempt corporations, and certain other
companies are not includible corporations, so they may not be
members of an affiliated group. Nevertheless, in certain
circumstances the U.S. owner of a non-U.S. company may elect to
treat that company as a pass-through entity for U.S. tax purposes.
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