USA Law and Practice Contributed by: Devon M Bodoh, Joseph M. Pari and Blake D. Bitter, Weil, Gotshal & Manges LLP
5.4 Tax Implications of Change of Control There are, in general, no specific indirect transfer rules, nor any specific indirect change-of-control provisions that should be subject to local taxation. 5.5 Formula-Based Income Attribution To the extent goods or services are provided to related parties, transfer pricing principles apply (see 4.4 Trans- fer Pricing Issues for Inbound Investors ). Specifi - cally, taxpayers are required to apply the arm’s length standard in establishing compensation amounts for the provision of intercompany goods and/or services. Accordingly, if one member of a group of related enti - ties provides goods or services for the benefit of (or on behalf of) another group member without charge or at a non-arm’s length charge, the IRS can make appropriate reallocations to reflect an arm’s length charge for those goods or services. If the services benefit more than one group member, the IRS bases the allocation on the relative benefit intended for each group member when the services are performed. These rules generally stipulate that taxpayers must apply one of six specified transfer pricing methods in evaluating the appropriateness of their intercompany services transactions. The six specified transfer pric - ing methods include three transactional approaches (ie, CUSPM, GSMM and CSPM), two profit-based approaches (ie, CPM and PSM) and a cost-based safe harbour (ie, SCM). 5.6 Deductibility of Intra-Group Management and Administrative Charges Management fees between controlled taxpayers are subject to US transfer pricing principles (see 4.4 Transfer Pricing Issues for Inbound Investors and 5.5 Formula-Based Income Attribution ). As discussed previously, entities should be charging an arm’s length fee for the services they provide; and, if this standard is not met, the situation can become exacerbated for tax purposes if the foreign subsidiaries are profitable in their home country while the US business is reflect - ing losses (meaning that the expenses in the USA are really supporting the foreign operations). In such circumstances, the IRS has the power to real - locate income and deductions between such parties in order to reflect what it believes to be the true econom -
tion, rather than an unincorporated operation. A US subsidiary of a foreign corporation would normally pay a 30% tax on dividends distributed to the foreign cor - poration (without an applicable tax treaty). To achieve a similar tax result, the foreign corporation is made liable for a 30% tax computed on its divi - dend equivalent amount (DEA). This is referred to as a “branch profits tax” (BPT), although it is imposed on most income that is effectively connected to a trade or business, even if formally there is no established branch. Thus, the BPT substitutes for the taxation of the foreign corporation’s shareholders while ensuring that US income is taxed twice, in accordance with the US two-tier system for taxing corporate profits (see 3.2 Individual and Corporate Rates ). 5.3 Capital Gains of Non-Residents Generally, capital gains from sales of stocks or bonds (ie, personal property) by non-US residents are exempt from US taxation and withholding (ie, as the residence of the seller generally determines whether such gain is foreign- or US-source). This rule, however, is sup - planted to the extent that the stock constitutes a “US real property interest” (USRPI), which includes an interest in stock of a “US real property holding cor - poration” (USRPHC). A USRPHC is generally a US corporation that holds US real property whose fair market value is at least 50% of the fair market value of all its real property and assets used in its trade or business. This regime is colloquially referred to as FIRPTA as it was enacted by the Foreign Investment in Real Property Tax Act. If applicable, such tax is enforced by a withholding regime that generally requires buyers to withhold 15% of the fair market value of the disposed USRPI. Sellers of corporate stock may generally provide a certifica - tion by the corporation upon sale that the corporation is not a USRPHC and may thus avoid FIRPTA tax and withholding (although the IRS is not bound by the cer - tification). Publicly traded corporations are subject to certain exceptions from both the substantive tax and withholding requirements.
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