Читать книгу International Taxation - Adnan Islam - Страница 34

The proposed rules define a foreign branch by reference to the Section 989 regulations, with modifications, such that a foreign branch must carry on a trade or business outside the United States and maintain a separate set of books and records. Therefore, activities undertaken within the United States would be excluded when determining whether activities rise to the level of a trade or business outside the United States. Under Section 1.989(a)-1(c), for activities to constitute a trade or business, they “must ordinarily include the collection of income and payment of expenses.” This requirement created the possibility that a branch that does not earn any regarded income is not a qualified business unit (QBU) under Section 989, regardless of the level of activity within the branch (for example, a maquiladora). In contrast, the proposed rules provide that, for purposes of determining whether this test is met in the context of Section 904, disregarded transactions are considered and may give rise to a trade or business for this purpose.

The decision to provide a rule considering disregarded transactions in determining whether the trade or business test is met for purposes of the foreign tax credit rules represents a departure from the Section 989 regulations. Accordingly, a branch that does not earn any regarded income (for example, because all of its transactions are with its owner) may constitute a foreign branch for purposes of the foreign tax credit limitation and Section 250, but might not be treated as a QBU for purposes of Section 987, which applies the definition in the Section 989 regulations. The foreign branch definition would not import the Section 989 regulations’ per se QBU rule for partnerships, but rather would provide that if a partnership’s activities constitute a trade or business conducted outside the United States, then those activities will constitute a foreign branch even if the partnership does not maintain books and records for the trade or business that are separate from the partnership’s books and records. Activities that constitute a permanent establishment in a foreign country under a bilateral U.S. income tax treaty would be presumed to constitute a trade or business conducted outside the United States.

Under new foreign branch regulations, post-TCJA, foreign branch category income is limited to the income of a U.S. person attributable to foreign branches held directly or indirectly (via disregarded entities, partnerships, or other pass-through entities) by such U.S. person. Foreign persons (including controlled foreign corporations or CFCs) cannot have foreign branch income. The proposed rules would define a U.S. person for this purpose to exclude pass-through entities (for example, partnerships). As such, foreign branch category income would be determined at the U.S. corporate or individual level, applying an aggregate theory for partnerships. Generally, the proposed rules would attribute gross income to a foreign branch to the extent such gross income is reflected on the foreign branch’s separate books and records, but would exclude the following.

1 Income attributable to activities carried out in the United States

2 Income relating to stock held by the foreign branch, such as dividends, CFC and PFIC inclusions (for example, Sections 951(a), 951A(a), and 1293(a)), and gain from the disposition of such stock (unless the stock is dealer property)

3 Income from the sale of interests in entities that are treated as pass-throughs or disregarded for U.S. federal tax purposes, except in the case of a disposition of a partnership interest that is in the ordinary course of the foreign branch owner’s trade or business — The ordinary course standard is deemed satisfied if there is at least 10% ownership of the entity and the owner and the entity are in the same or related businesses.

4 Income or payments reflected (or not reflected) on the books and records if “a principal purpose” of recording (or not recording) the item is tax avoidance and the books and records do not reflect the substance of the transaction — For this purpose, a foreign branch’s related party interest income (other than certain financial services income) is presumed to be excluded from foreign branch category income.

These exclusions from foreign branch category income, and in particular the presumption for related party interest, intend to prevent taxpayers that may otherwise try to artificially shift mobile, low-taxed income into an otherwise high-taxed foreign branch category, resulting in cross-crediting that would be contrary to the purpose underlying the establishment of the foreign branch category.

The TCJA imposes limits on the use of foreign tax credits for foreign branches and establishes a separate foreign branch limitation category, or “basket.” The new law holds that U.S. tax on branch business income can be reduced only by taxes paid by a foreign branch of the U.S. consolidated group, and any excess foreign income taxes of a group’s foreign branches cannot be used to reduce U.S. tax on other foreign-source income of the consolidated group. See the Foreign Tax Credit chapter.

Generally, distributions (that is, branch remittances) from a foreign branch to a U.S. home office are not subject to U.S. taxation. Such distributions include distributions of branch profits and “dividends” paid by disregarded entities, interest paid to the home office on loans from the home office, and repayments of loan principal to the U.S. shareholder or owner. If a foreign branch has a functional currency other than the U.S. dollar, however, such distributions can result in foreign currency gain or loss based on changes in the exchange rates between the time the branch income was included in the U.S. group’s income and the date such amounts are distributed to the home office. It is not clear whether such gain or loss is within the branch foreign tax credit limitation basket.

A foreign country may impose withholding tax on payments made by a foreign branch to its home office. Although such taxes may be claimed as a credit, the new law is not clear about whether such taxes are within the foreign tax credit category for branch income or whether they fall within the general limitation category. There appears to be an error in the revised Section 904 foreign tax credit limitation provisions that treats such foreign taxes as within the branch category as well as taxes on disregarded payments not involving a branch (the section cross-reference should be to the general basket).

Under the TCJA, all gain on the transfer of assets to a foreign subsidiary is taxable. The transfer of goodwill and going concern value, as well as identifiable intangible property, is treated as a contingent sale of the property with an amount reported annually that is commensurate with the income generated by the property transferred. Upon incorporation, the losses of a branch are recaptured (for example, branch loss recapture [BLR] rules) to the extent that the aggregate losses exceed prior income earned by the branch. Under the TCJA, the amount of such loss recapture is not limited to gain on the assets transferred (although the amount of recapture income reduces the gain on assets transferred that is otherwise subject to taxation). Other loss recapture rules may also apply where the branch has a DCL or the group has an overall foreign loss.