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

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.

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

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?

Learning Objectives

After completing this course, you will be able to:

• Determine what constitutes a U.S. trade or business for purposes of the branch profits tax
• Decide how to calculate the change in U.S. net equity
• Identify specific activities that generate effectively connected income in the U.S.
• Ascertain which U.S. income tax treaties include provisions for lower branch profits rates

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite: Three years+ business or public firm experience preparing complex tax forms and schedules, supervising other preparers or accountants. Specific knowledge and understanding of international taxation including residency determination, foreign entity classifications, application of treaty benefits, as well as GILTI, Subpart F, and the related Section 250 deductions.

Strafford Publications, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of Accountancy have final authority on the acceptance of individual courses for CPE Credits. Complaints regarding registered sponsons may be submitted to NASBA through its website: www.nasbaregistry.org.

IRS Approved Provider

Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).