International Taxation - Module 6 HW Foreign Persons Doing Business in the US

Answer all of the following questions.

1. Cholati is a foreign corporation that produces fine chocolates for sale worldwide. Cholati markets it chocolates in the United States through a U.S. limited liability company that is treated as a disregarded entity for U.S. tax purposes. The hybrid branch operates a sales office located in New York City. During the current year, Cholatis effectively connected earnings and profits are $3 million, and its U.S. net equity is $6 million at the beginning of the year, and $4 million at the end of the year. In addition, a review of Cholatis interest expense account indicates that it paid $440,000 of portfolio interest to an unrelated foreign corporation, $200,000 of interest to a foreign corporation which owns 15% of the combined voting power of Cholatis stock, and $160,000 of interest to a domestic corporation.

a.) Compute Cholatis branch profits tax, and

b.) Determine its branch interest withholding tax obligations. Assume that Cholati does not reside in a treaty country.

2. Wheelco, a foreign corporation, manufactures motorcycles for sale worldwide. Wheelco markets its motorcycles in the United States through Wheely, a wholly-owned U.S. sales subsidiary that derives all of its income from U.S. business operations. Wheelco also has a creditor interest in Wheely, such that Wheelys debt to equity ratio is 3 to 1, and Wheely makes annual interest payments of $60 million to Wheelco. The results from Wheelys first year of operations are as follows:

Sales ................................................................. $180 million

Interest income ..................................................... $6 million

Interest expense (paid to Wheelco) .................. ($60 million)

Depreciation expense ....................................... ($30 million)

Other operating expenses ................................. ($81 million)

Taxable income .................................................. $15 million

Assume the U.S. corporate tax rate is 35%, and that the applicable tax treaty exempts Wheelcos interest income from U.S. withholding tax. Compute Wheelys interest expense deduction.

3. A foreign corporation can structure its U.S. operations as either a branch or a subsidiary. What are the tax advantages of operating in the United States through a separately incorporated subsidiary? What are the tax advantages of operating in the United States through an unincorporated branch? What general business factors should be considered when choosing between the branch and subsidiary forms of doing business in the United States?