Question

How is a foreign entity which operates in the United States as a Branch taxes? Include in your answer a discussion of the “branch profits tax” and it’s operation with relevant code sections?

Answer 1

1--the tax consequences of a foreign branch versus a foreign subsidiary corporation. In the case of a foreign branch, the foreign government imposes income tax on the pre-tax income and branch profit tax on the "dividend equivalent amount." The dividend equivalent amount is the after-tax income adjusted by the change in equity.

2---The U.S. government would impose tax on a foreign branch's entire amount of profit, but only on the foreign subsidiary corporation's cash dividends received. A foreign branch's loss is fully deductible against the U.S. tax liability, but not a foreign subsidiary corporation's loss. The foreign financial statements must be translated into U.S. dollars in determining the corporation's taxable income.

3---The branch profits tax was implemented to subject the income earned by foreign corporations operating in the United States to two levels of taxation like income earned and distributed by domestic corporations

4--Along with the branch profits tax on repatriated earnings, the code also imposes a 30 percent tax on interest paid or deemed paid by a branch of a foreign corporation engaged in a US trade or business. Without this tax it would be possible for foreign corporations to avoid the branch profits tax altogether by making interest payments to foreign investors directly because interest payments by a foreign corporations would likely be foreign source income not subject to a 30 percent tax.

5--Under the branch profits regime, income is taxed at a maximum marginal rate of 35 percent when it is earned, and an additional 30 percent branch profits tax is imposed when the income is repatriated to the foreign headquarters. These two taxes correlate to the tax imposed on domestic corporations when income is earned and the tax on shareholders when income is distributed i.e. through dividend.