2. Policy Overview Section 367 of the Code, which originated in the Revenue Act of 1932, is one of several tax provisions that gave the Service greater discretion and flexibility in the application of other Code provisions in order to prevent the use of those provisions for tax avoidance.
3. Policy Overview Section 367(a)(1) provides generally that transfers of appreciated property by a U.S. person to a foreign corporation will be currently taxable to the transferor.
4. Policy Overview Section 367 prevents taxpayers from using various non-recognition provisions to avoid tax and requires either a payment of tax or in some cases to enter into gain recognition agreement. Section 367 does allow tax-free transfers of certain assets that will be used in the active conduct of a trade or business.
5. Policy Overview Section 367 also contains a “foreign branch loss recapture” provision. This provision requires that the US taxpayers to report as taxable income any prior foreign branch losses that were deducted when the branch is incorporated See 1-34
8. Transfer of Share Example For. Co. Assume Foreign Patent wishes to obtain a 20% interest in the profitable subsidiary in exchange for a capital contribution US Hold Co. See Page 1-35
9. Transfer of Share Example For Co Hold Co’s transfer of shares to the Foreign Parent are taxable at the FMV US Hold Co 20% See Page 1-35
12. Module 6 “Foreign Currency” What is “Functional Currency” Look at Rules in §985. Definition “QBU” –A separate and clearly identifiable unit of a trade or business which has a separate set of books. See Page 1-36
13. § 985 Functional currency “functional currency” means— the currency of the economic environment in which a significant part of such unit's activities are conducted and which is used by such unit in keeping its books and records. See 1-36
14. Overview of rules When a taxpayer acquires a non-functional currency, it acquires an asset with a historical basis based on the dollar value expended to buy such currency. Example: US taxpayer purchase yen to pay a yen denominated debt. The yen is a non-functional currency.
15. Discussion of Rules A taxpayers functional currency is the key determinant as to when a taxable event occurs with regard to foreign exchange provisions. SEE Page 1-37 NON-FUNCTIONAL CURRENCY IS NOT MONEY. IT IS PROPERTY WITH A HISTORICAL BASIS. See 1-37
16. See 1-37 and 1-38 Example US taxpayer purchases 1,000 shares of Canadian Company for 1M. (Fx is .95:1) Subsequently sells when Fx 1:1 What is the gain?
17. Discussion Functional currency is defined as the currency of the economic environment the taxpayer conducts a significant part of its business Date of purchase US Co paid $950,000 (1M *.95) basis is therefore 950K. Sale is 1.1M when Fx is 1:1 Gain is 150K
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19. Expense Example 1-40 Invoiced 10K yen when Fx is 130:1 US Co books journal entry (10K/1.3) 76,923 Payment date Fx 1.25:1 80,000 (3,077)
20. Debrief Taxpayers functional currency is the key determinate whether a taxable event occurred Acquisition and dispositions of “non-functional currency by a US taxpayer are taxable events Section 988 treats these gains and losses as ordinary Non-functional Currency is not money - it is property with a historical tax basis
22. Policy Concerns Congress was concerned that allowing the dual consolidated corporation to use the same loss deduction in two different groups gave an undue advantage to certain foreign investors that made U.S. investments through dual resident corporations
23. 23 What is a Dual Consolidated Loss? The term “dual consolidated loss” means any net operating loss incurred in a year in which the corporation is a dual resident company; AND in the case of a separate unit, the net loss attributable to the separate unit I.R.C. § 1.1503-1(b)(5)(i) The DCL rules are generally designed to prevent companies with tax residency in two jurisdictions from using the same losses to obtain tax benefits in both jurisdictions
24. 24 Where do I look to find the tax law on “Dual Consolidated Losses” (“DCL”)? I.R.C. § 1503(d)
25. 25 What is NOT considered a Dual Consolidated Loss A “dual consolidated loss” shall not include any loss which, under the foreign income tax law, does not offset the income of any foreign corporation. I.R.C. § 1503(d)(B)
26. Definition Dual Resident Company Section 1503(d) – a domestic corporation subject to tax in a foreign country on either a world wide basis or “residence” basis
27. This happens because A company satisfies a single relations in both countries simultaneously
28. Treas. Reg. 1.1503(d)-5(b)(1) Any NOL incurred in a year in which the corporation is a DRC. Determined under U.S. tax principles NOL C/F and C/B not included Capital Loss C/F and C/B not included
32. 32 Corporation “Double Dip” UK Interest Expense Included Bank Third Party Lender US/UK Dual Resident Company- Loss in Both Jurisdictions US Interest Expense included
33. 33 Branch “Double Dip” US Bank Third Party Lender FC FC Interest Expense (100) Income 100 Because of this ability to use losses in both jurisdictions in 1988, Congress came up with the “Separate Unit loss” concept.
34. 34 New “DCL” Regulations Regulations designed to accommodate the proliferation of disregarded entity structures and how to treat them under DCL situations Dual Resident Companies Important Concepts Separate Units
35. 35 Change in Regulations for 2007 FCO USCO DRP 2007 Regs DRP is NOT a Separate Unit and NO DCL 1992 Regs. DRP is Separate Unit and also a DCL Net Loss (100)
36. 36 1992 Regs Separate Units and DCL USP1 USP2 HE2 HE1 2007 Regs Combine into Single Separate Unit with 10 of income Income 110 Loss (100) Separate Unit Combination Rule
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39. 39 Let’s do DCL Accounting USCO (200) USCO (200) Foreign Branch +100 FDE +100 USCO Loss is allocated between US and Foreign under §864(c) Only Items on the FDE ledger is used to compute DCL
40. Dual Consolidated Loss Definition – Section 1503(d) “dual consolidated loss” any net operating loss of a domestic corporation incurred in a year in which the corporation is a “dual resident corporation”
41. Debrief Dual consolidated loss is any NOL incurred in a year that a corporation is a DRC Determined under U.S. tax principles A “dual consolidated loss” shall not include any loss which, under the foreign income tax law, does not offset the income of any foreign corporation.
