- 14 -
on Taxation, General Explanation of the Tax Reform Act of 1986,
at 1037 (J. Comm. Print 1987). To achieve that result, three
distinct taxes may be imposed.6 Section 884(a) imposes a tax on
earnings of a U.S. trade or business deemed to be repatriated by
a foreign corporation. Section 884(f)(1)(A) treats certain
interest paid by the U.S. trade or business of a foreign
corporation (referred to as branch interest) as if it were paid
by a domestic corporation. This is accomplished by subjecting
the interest to withholding under sections 881(a) and 1442, as if
it were U.S.-source income paid to a foreign person or entity.
Finally, section 884(f)(1)(B) imposes a tax on excess interest to
the extent the interest deduction allocable to the U.S. trade or
business in computing its taxable ECI (as provided for in section
1.882-5, Income Tax Regs.) exceeds the branch interest of section
884(f)(1)(A). The excess interest is treated as if it were paid
to the foreign corporation by a wholly owned domestic corporation
6 The three taxes to achieve parity are in addition to any
tax under sec. 882(a) on income of a foreign corporation engaged
in a trade or business within the United States that is
effectively connected with the conduct of the trade or business
in the United States.
"Effectively connected income" (ECI) is a term of art
defined in sec. 864(c). ECI includes certain types of foreign
source income earned by a foreign corporation. Sec. 882 allows
certain deductions and credits for ECI, and the net income is
subject to tax.
Conversely, income that is not effectively connected with
the conduct of a trade or business in the United States is
subject to U.S. taxation at a flat rate of 30 percent unless a
different amount is provided for in an income tax treaty. Sec.
881.
Page: Previous 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 NextLast modified: May 25, 2011