International Tax

Foreign Corporation Earnings and Profits (Portfolio 932)

  • This Portfolio explains how the earnings and profits (E&P) of foreign corporations are computed, accounted for, and applied for U.S. tax purposes.

Description

Determining a foreign corporation’s E&P is essential in many transactions, because E&P often controls the result of such issues as the amount of income recognized, the character of such income, the timing of recognition, and whether and to what extent a foreign tax credit is available. Bloomberg Tax Portfolio, Foreign Corporation Earnings and Profits, describes how to compute post-1986 Tax Reform Act E&P under the functional currency method, the U.S. dollar approximate separate transactions method, and the U.S. dollar separate transactions method, and how to compute pre-1986 Tax Reform Act E&P under the §902 method, the partial §964 method, and the full §964 method.

The discussion includes the effect of blocked E&P, the foreign corporation’s tax accounting methods and elections, the corporation’s taxable year, and foreign currency translation. The Portfolio also discusses accounting aspects of E&P, including (1) layering and pooling; (2) maintaining separate baskets of E&P; (3) source of E&P; (4) the effect of distributions, including distributions of previously taxed income; (5) the looknthrough rules for controlled foreign corporations; (6) the effect of tax redeterminations and adjustments; and (7) reporting and recordkeeping requirements.

The Portfolio then analyzes the application of the E&P rules to: (1) the indirect foreign tax credit under §§902 and 960; (2) the E&P limitation on subpart F income; (3) investment in U.S. property by controlled foreign corporations; (4) sales or exchanges of foreign corporation stock subject to §1248; (5) reorganizations and incorporation transactions subject to §367; (6) §338 elections by foreign corporations; (7) passive foreign investment companies; and (8) §864(e) asset based interest expense allocation.

A detailed case study in the Worksheets illustrates the principles described in the Detailed Analysis.

Table of Contents

I. Computation of Earnings and Profits
II. Accounting for Earnings and Profits
III. Application of Earnings and Profits

Daniel-Lange
Daniel Lange
Deloitte Global Leader, Tax & Legal
Deloitte Tax LLP
Richard A. Gordon
Richard A. Gordon
Merrill Lynch & Co.
pronley_timothy_2015
Timothy Pronley
Deloitte Tax LLP
Michael_Layden
Michael Layden
Partner - International Tax Services
Deloitte Tax LLP
Darwin Broenen
Darwin Broenen
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