Foreign Corporation Earnings and Profits (Portfolio 932)

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.