TAX 9869 Lecture Notes - Lecture 46: Investment, Withholding Tax, Tax Treaty

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17 Jul 2020
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Unit 10: Business Income- Advanced Issues
10.01 Inventory Income
With respect to nonresidents, the source of income from sales of inventory property is
generally sourced to the jurisdiction in which title passes(where the sale occurs)
–When a TP manufactures it’s own inventory in the U.S. and sells it abroad, or manufactures
abroad and sells in the U.S., income must be split accordingly.
The method that is used for sourcing purposes must also be used for the allocation and
apportionment of expenses.
10.02 Branch Profits TaxesIn General
Foreign corporations engaged in a U.S. trade/business are generally subject to the Branch
Profits Tax rules.
Designed to parallel the U.S. tax treatment of foreign corporations doing business through a
branch with the tax treatment of foreign corporations operating business through a U.S.
subsidiary.
•The subsidiary is subject to a corporate level tax on worldwide income plus a withholding tax on
dividends repatriated to it’s foreign owners.
•The foreign corporation is subject only to U.S. taxation on effectively connected income.
The branch profits taxes impose on corporations doing business in an unincorporated form an
additional 30% that simulates the additional withholding tax that would be imposed on earnings
repatriated by a U.S. subsidiary via dividends.
–The first branch profits tax equals 30% (or a lower treaty rate) of a foreign corporation’s
“dividend equivalent amount.”
•The dividend equivalent represents the foreign corporation’s current earnings and profits from a
domestic trade or business as adjusted for net increases and decreases in U.S. net equity and
as adjusted in other ways.
•The dividend equivalent amount is essentially the amount available for repatriation.
Ex) The amount that would be treated as a dividend if distributed to the foreign parent of the
branch were a subsidiary corporation.
The second branch profits tax, the branch interest tax, is a 30% withholding tax(or a lower tax
treaty rate) on interest paid by a foreign corporation’s domestic trade/business.
•Applies if the recipient of the interest is a foreign person not engaged in a domestic
trade/business.
Note: Interest payments from a domestic subsidiary to a foreign parent would not be eligible for
the portfolio interest exception.
–The third profits tax is imposed at the corporate level on “branch excess interest.”
•A foreign corporation is liable for a 30% tax(or a lower tax treaty rate) if the amount of the
interest deduction allowed to the foreign corporation under §882 exceeds the amount of interest
paid by that corporation’s domestic trade or business.
•Such excess is treated as interest paid to that foreign corporation by a wholly-owned U.S.
subsidiary.
•This tax treats the foreign branch as having paid the amount of interest deducted from
effectively connected income under §882 as U.S. source income.
•Any excess deduction is treated as if a foreign parent were financing a U.S. subsidiary.
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