Corporate Tax 2010 - BMR Advisors

Cravath, Swaine & Moore LLP
USA
6.4 Would such a branch be subject to a branch profits tax (or
other tax limited to branches of non-resident companies)
Yes. In the absence of a treaty, a branch of a foreign corporation is
subject to a 30% branch profits tax on its after-tax “dividend
equivalent amount”. A branch’s dividend equivalent amount is its
effectively connected earnings and profits for the taxable year to the
extent that they are not reflected in the corporation’s U.S. net equity.
A branch cannot literally pay a “dividend” for U.S. income tax
purposes, because a dividend is defined as a distribution from a
corporation to its shareholders. The branch profits tax is therefore
intended to tax the branch on the repatriation of its earnings in a
manner similar to the taxation of a dividend paid by a U.S.
subsidiary, which is subject to withholding tax at a 30% or reduced
treaty rate.
Treaties may reduce or eliminate the branch profits tax. Typically,
treaties that reduce the rate of dividend withholding tax also reduce
the rate of branch profits tax. If a treaty reduces the rate of dividend
withholding tax but does not address the branch profits tax, the
branch profits tax is generally limited by the U.S. Internal Revenue
Code to the treaty rate of dividend withholding.
6.5 Would a branch benefit from tax treaty provisions, or some
of them
A U.S. branch of a non-U.S. entity generally will not be treated as
a resident of the U.S. under treaties between the United States and
other countries, and thus will not be eligible for benefits provided
by those treaties to U.S. persons.
An entity with a U.S. branch may, however, benefit from a
reduction of U.S. tax under a treaty between the United States and
the entity’s home country. For example, if the entity is a tax
resident of the treaty partner, the amount of its branch’s income
subject to U.S. tax may be limited to its profits attributable to a
permanent establishment in the United States, which may reduce its
tax burden (see question 6.3). If the entity is a qualified resident,
remittances from the branch may be eligible for a reduction of the
branch profits tax under a treaty (see question 6.4).
6.6 Would any withholding tax or other tax be imposed as the
result of a remittance of profits by the branch
Yes. The branch profits tax imposes a tax if profits are remitted by
the branch (see question 6.4).
7 Anti-avoidance
7.1 How does the USA address the issue of preventing tax
avoidance For example, is there a general anti-avoidance
rule or a disclosure rule imposing a requirement to
disclose avoidance schemes in advance of the company’s
tax return being submitted
Although there is no overarching anti-avoidance rule under U.S.
federal tax law, numerous statutory and regulatory provisions are
designed to discourage evasive tax planning. Examples include:
civil penalties covering a range of noncompliant activities,
including inaccurate filings and tax shelters;
prohibitions on acquiring another corporation with losses or
other tax attributes with the principal purpose of evading
federal income tax;
anti-deferral regimes that prohibit inappropriate deferrals of
U.S. tax on foreign earnings of U.S. multinational
corporations;
transfer pricing regimes that prohibit deferrals or avoidance
of U.S. intercompany tax by U.S. multinational corporations
through sales or other transactions on non-arm’s length
terms;
treaty-shopping restrictions; and
reporting requirements for taxpayers who engage in certain
abusive transactions.
In addition to specific statutory provisions, judicial doctrines have
developed to prevent tax results that are inconsistent with the intent
of Congress. For example, under the “economic substance
doctrine”, a court or the IRS may recast the legal form of a
transaction to reflect the underlying economic reality. Similarly, a
court or the IRS may apply the “step-transaction” doctrine by
combining multiple parts of an overall plan when the separate
treatment of each part produces an inappropriate tax result. Both
the economic substance and the step transaction doctrines seek to
tax a particular transaction in accordance with its substance,
without regard to its legal form; that is, where literal statutory or
regulatory compliance results in an unintended tax consequence, a
court may recharacterise the transaction appropriately.
The Obama administration has proposed additional anti-avoidance
measures in conjunction with the President’s 2010 budget proposal,
which was submitted to Congress on May 7, 2009. The proposal
includes: (i) codification of the economic substance doctrine; (ii)
more robust information reporting and withholding requirements
for certain foreign financial institutions; (iii) prohibition of the use
of certain “hybrid entities”, or entities that are disregarded from
their owners for U.S. Federal income tax purposes but recognised
under foreign law; and (iv) further limitations on taxpayers’ ability
to shift income through intangible property transfers. As of the date
of this publication, none of these proposals have been enacted.
USA
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