International Tax Management. Aaron Hasenkamp April 9, 2006. Discussion of. Branch versus Subsidiary status. Intertemporal Considerations. Mathematics of how profits change as the transfer price changes. Branch versus Subsidiary status. Main difference is the timing of taxation.
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April 9, 2006
Consider the text’s example of C&C Enterprises, a manufacturer of ski paraphernalia and sporting goods. There is only a home office in Chicago and no domestic profit or loss. What is important however is their overseas interactions and they desire to know what the most profitable configuration may be…
If there is no repatriation of profits, establish profitable operations as subsidiaries. If a foreign operation posts losses rather than profits, it is advisable to set up as a branch if the losses can be used to offset profits elsewhere, but to set it up as a subsidiary if this is not the case
If there is no Repatriation, show subsidiary profits in the lowest-tax jurisdictions by allocating costs to the highest-tax jurisdictions, without making profits negative.
If there is no repatriation, show subsidiary profits in the lowest-tax jurisdiction by following a simple rule:
If one subsidiary is selling to a foreign subsidiary, set the transfer price as high as possible when T*>T and as low as possible when T*<T, without making profits negative.
If there is no Repatriation of profits, minimize total subsidiary taxes paid in the presence of import tariffs by comparing T* to T+T*d(1-T*):
Use the high transfer price if T*> T+T*d(1-T*), and use the low price if the opposite occurs, without making profits negative.
Repatriate profits from branches first because this action is without tax consequences.
If there is full repatriation of profits, and there are no excess tax credits, the decision between establishing a branch of subsidiary generally does not matter. If there is full repatriation of profits, and there are excess tax credits, establish branches to generally avoid the withdrawing taxes on profit repatriation. As before, establish unprofitable operations as branches to receive immediate tax benefits.
If there is partial repatriation from subsidiaries, pay dividends from subsidiaries where the sum of the withholding tax and the additional tax liability to the U.S. Government is the lowest. If there are several opportunities with the same marginal cash outflows, repatriate from countries which would result in the least excess tax credits.
If there is partial repatriation from foreign operations, compare the advantage of tax deferral associated with a subsidiary against the withholding taxes incurred upon repatriation from the subsidiary in deciding whether to establish a subsidiary or a branch.