Branch Profits Tax: Form 1120-F Reporting, Identifying Trade or Business, Determining Treaty Benefits

Recording of a 110-minute CPE webinar with Q&A

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Conducted on Tuesday, August 30, 2022

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This course will explain the nuances of branch profits tax, including what entities are subject to this additional tax, how U.S. effectively connected income, dividend equivalent amounts, and the change in U.S. net equity is determined, and the effect of U.S. income tax treaties on the branch profits tax rate.

Description

The branch profits tax is a second level of tax assessed on foreign corporations with U.S. branches that do not reinvest its earnings back into a U.S. trade or business. This tax is in addition to the Section 882 corporation income tax. Since earnings between U.S. parent corporations and subsidiaries are effectively taxed twice, once at the corporate level and again when dividends are distributed, this 30 percent tax is meant to equalize the tax burden of U.S. and foreign corporations. The U.S. currently has over 60 income tax treaties with other countries, many of which offer a lower branch profit tax rate.

The rules for the calculation of branch profits tax are complex. The 30 percent tax is charged on the corporation's dividend equivalent amount for the tax year. The dividend equivalent amount is its effectively connected earnings and profits, adjusted based on the change in U.S. net equity. Form 1120-F Section II is used to calculate income effectively connected with the conduct of a trade or business in the U.S. Section III begins with ECI, adds or subtracts applicable adjustments, determines the change in U.S. equity, and finally calculates the tax itself. Tax practitioners working with foreign corporations and branches need to understand the components and considerations of the branch profits to properly tax and utilize treaty benefits for these entities.

Listen as our panel of foreign income tax experts explains the calculation and reporting of the branch profits tax for international tax advisers and foreign businesses.

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Outline

  1. Branch profits tax: introduction
  2. Foreign corporations
  3. U.S. trade or business
  4. Effectively connected income
  5. Income tax treaties
  6. Calculating the tax
  7. Reporting the tax
  8. Special rules and exceptions
  9. Best practices

Benefits

The panel will cover these and other key issues:

  • Determining when a U.S. branch is subject to the additional branch profits tax
  • Identifying branch profits provisions in specific treaties
  • Reporting the tax on Form 1120-F, Schedules II and III
  • Determining the change in U.S. net equity
  • When is a branch considered engaged in a U.S. trade or business?

Faculty

Kennedy-C. Edward
C. Edward Kennedy, Jr., CPA, JD

Managing Director
C Edward Kennedy Jr

Mr. Kennedy has more than 36 years of experience dealing with a variety of international tax matters, specializing in...  |  Read More

McCormick, Patrick
Patrick J. McCormick, J.D., LL.M.

Founder/Managing Partner
McCormick Tax

Mr. McCormick specializes in the areas of international taxation, tax compliance, and offshore reporting...  |  Read More

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