USA Law and Practice Contributed by: Devon M Bodoh, Joseph M. Pari and Blake D. Bitter, Weil, Gotshal & Manges LLP
sequences, but which may generally be ameliorated by certain elections. The USA imposes worldwide taxation on US busi - ness entities, and a foreign branch is not considered an entity separate from its owner. As such, foreign branch income is deemed to be derived directly by its US corporate owner and is subject to corporate income tax on a net basis. Branch income is gener - ally determined based on the income reflected in the foreign branch’s separate books and records, and the US home office is allowed an FTC on taxes paid in the branch’s jurisdiction (subject to certain limitations and “basketing” rules). 6.6 The Substance of Non-Local Affiliates There are various US judicially developed doctrines that are designed to look beyond the form of a trans - action and disallow otherwise applicable tax benefits if the transaction violates the spirit of the law (see 7.1 Overarching Provisions ). Furthermore, the limitation on benefits and other anti-treaty shopping provisions contained in US tax treaties generally look at the “sub - stance” of a non-local affiliate in such jurisdiction in determining whether the benefits afforded by such treaty may apply (see 4.3 Tax Authority Scrutiny of “Treaty Shopping” Practices ). 6.7 The Sale of Shares in Non-Local Affiliates A US corporation that is a US shareholder of a CFC will recognise a portion of any gain on the sale or exchange of stock in a CFC as a dividend, generally to the extent of the E&P in the CFC that are attribut - able to the stock sold or exchanged. In the case of the sale or exchange by a US corporation of stock in CFC held for one year or more, any amount received by the US corporation that is treated as a dividend may also qualify for exemption under the DRD rules (see 6.3 Dividends From Foreign Subsidiaries ) to the extent that the sale does not result in an “extraordi - nary reduction” under the applicable rules. In the case of an extraordinary reduction, certain elections can be made (either solely by a buyer of the CFC stock or by both the buyer and the US shareholder of the CFC) to ensure qualification for the exemption under the DRD rules.
Furthermore, if a CFC sells or exchanges stock of a lower-tier CFC and any gain is treated as a dividend (similar to the rules noted above), the foreign-source portion of that dividend will be treated as subpart F income of the selling CFC for which a US shareholder may be permitted a DRD.
7. Anti-Avoidance Provisions 7.1 Overarching Provisions
There are various judicially developed doctrines that are comparable to a general anti-abuse rule, such as the “substance over form”, “step transaction”, “eco - nomic substance”, “business purpose” and “sham transaction” doctrines. All these doctrines generally serve a similar purpose: to look beyond the form of a transaction and disallow otherwise applicable tax benefits if the transaction violates the spirit of the law. In addition, the economic substance doctrine was added to the Code and carries with it a 20% non- compliance penalty, which can be increased to 40% if the transaction is not properly disclosed. Apart from the judicially developed doctrines described above, there are various statutory and reg - ulatory provisions that provide anti-avoidance rules. Recently, the IRS released separate guidance impos - ing anti-avoidance-related party basis adjustment rules in the context of partnership acquisitions, and re-affirming the IRS’ sentiments regarding the realisa - tion of tax benefits upon the acquisition of control of a corporation, which, in each case, further highlight the IRS’ attitudes regarding transactions where otherwise applicable tax benefits would have been realised.
8. Audit Cycles 8.1 Regular Routine Audit Cycle
The Code requires that the IRS assess, refund, credit and collect taxes within specific time limits, known as the statute of limitations. When the statute of limita - tions expires, the IRS can no longer assess additional tax, allow a claim for refund by the taxpayer or take collection action. The determination of statute expiry differs for assessment, refund and collection.
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