1 Basic framework

1.1 Is there a single tax regime or is the regime multi-level (eg, federal, state, city)?

The US corporate tax system is a multi-level tax regime. The corporate tax system is set up at federal and state level. Within a state, each municipal government can impose tax on business activities that happen within its jurisdictions. Since the federal and state tax systems have separate authority, the codes are separate as well. The federal corporate tax provisions are incorporated in the Internal Revenue Code, while each state has its own revenue codes.

1.2 What taxes (and rates) apply to corporate entities which are tax resident in your jurisdiction?

In 2017, the US Tax Cuts and Jobs Act replaced the previous graduated corporate income tax structure with a flat 21% corporate income tax rate on US corporate entities. The Tax Cuts and Jobs Act also repealed the corporate alternative minimum tax.

Currently, the federal income tax rate on corporations is a flat rate of 21%, but state and local income tax rates vary. Out of 50 states in the United States, 44 levy a corporate income tax, ranging from 2.5% to 11.5%. Some states impose gross receipts taxes instead of corporate income taxes. In addition, neither South Dakota nor Wyoming imposes a corporate income or gross receipts tax.

1.3 Is taxation based on revenue, profits, specific trade income, deemed profits or some other tax base?

It depends. At the federal level, corporate income tax is based on the taxable (‘profit') income of a corporate entity, which is the sum of gross revenue less applicable business deduction. The taxable amount can be further reduced by various tax credits.

However, some state and local governments levy taxes based on:

  • the gross income (gross receipts taxes);
  • the nature of the business activity (eg, excise tax, hotel occupancy tax); and
  • the value of the real estate asset (eg, property tax).

1.4 Is there a different treatment based on the nature of the taxable income (eg, gains on assets as opposed to trading income or dividend income)?

A corporate entity's taxable income generally consists of:

  • its day-to-day business operating income (‘ordinary income'); and
  • non-operating income, such as from the sale of its capital assets (‘capital gains'), interest income or investment income.

Under the current US tax rules, the same corporate income tax rate applies to capital gains and ordinary income. Therefore, the tax treatment, as it relates to the tax rate, is indifferent to the nature of the taxable income.

1.5 Is the regime a worldwide or territorial regime, or a mixture?

The 2017 Tax Cuts and Jobs Act added some territorial features to the US tax regime, as any distribution of foreign source dividends received by US corporate entities is now deductible 100% from the taxable income. This new feature has allowed US corporations to repatriate dividends from their foreign investments without paying additional tax other than the corporate income tax imposed in the country of the foreign investment.

However, US corporations must still report all income regardless. Other than foreign received dividends, direct earnings from overseas business activities (eg, branch offices) and passive income generated by foreign entities that are owned and controlled by US corporations are still subject to tax in the United States. Therefore, the US corporate tax regime is still largely a worldwide tax regime, as US corporate entities continues to report their worldwide income and pay taxes on their worldwide taxable income.

1.6 Can losses be utilised and/or carried forward for tax purposes, and must these all be intra-jurisdiction (ie, foreign losses cannot be utilised domestically and vice versa)?

Yes, losses can be utilised under the current US tax law. When a corporate entity's business deductions exceed its gross revenue in a particular tax year, the corporate entity will be considered to have a net operating loss (NOL). If the corporate taxpayer is filing a consolidated tax return with its foreign subsidiaries, it can potentially utilise the losses (when foreign deductions exceed foreign source income) generated by its foreign subsidiaries to offset its US source income under the Section 904 overall foreign loss rule.

Since 2018, US corporate entities must carry the NOL forward indefinitely. The use of the NOL deduction is limited to 80% of the entity's taxable income. Since 2020, the CARES Act has allowed an NOL from tax years beginning in 2018, 2019 or 2020 to be carried back for five years. The CARES Act has also temporarily removed the 80% taxable income limitation to allow US corporate entities to use a NOL to fully offset their taxable income.

1.7 Is there a concept of beneficial ownership of taxable income or is it only the named or legal owner of the income that is taxed?

Under US tax law, every taxpayer (both individual and entity) must file a tax return each year to report its self-assessed tax liability to the federal and state tax authorities. Therefore, a taxpayer must include any income that it has physically or constructively received. If an income beneficial owner allows a third party to receive such income, it is constructively received. Such income will be taxed in the hands of the beneficial owner even if it is legally transferred to another person.

1.8 Do the rates change depending on the income or balance-sheet size of the taxpayer?

Under the current US tax rules, a corporate taxpayer is taxed at a flat federal income tax rate of 21%, regardless of the size of its revenue, profits or assets. This is a departure from prior law, which allowed for a graduated or progressive rate up to 35%.

1.9 Are entities other than companies subject to corporate taxes (eg, partnerships or trusts)?

Under US tax rules, non-corporate entities such as partnerships and trusts are not subject to corporate taxes or entity-level taxes. However, a limited liability company which is regulated by state laws can elect to be taxed as a corporation for federal tax purposes.

2 Special regimes

2.1 What special regimes exist (eg, for fund entities, enterprise zones, free trade zones, investment in particular sectors such as oil and gas or other natural resources, shipping, insurance, securitisation, real estate or intellectual property)?

The United States has a multi-level tax regime comprising federal, state and local governments. All of these can provide tax incentives, including tax credits, enhanced deductions and tax holidays aimed at encouraging certain business activities, investments, business relocation and expansion of existing operations within their jurisdictions.

Some of the most common credits and incentives include the following:

  • the special tax regime for opportunity zones;
  • the special tax regime for small businesses;
  • incentives for educational activities;
  • regional development incentives;
  • benefits granted for the export of goods and services;
  • the special regime for the Information Technology Export Platform;
  • incentives for technological innovation;
  • incentives for information technology and automated products;
  • incentives for the development of infrastructure;
  • investment credits – that is, rehabilitation, solar energy investment and reforestation credits, and federal business energy investment credit (also known as corporate tax credit), among others;
  • the work opportunity credit;
  • the credit for increasing research activities;
  • the low-income housing credit;
  • the orphan drug credit;
  • the disabled access credit;
  • the qualified plug-in electric and electric vehicle credit;
  • the renewable electricity, refined coal and Indian coal production credit;
  • the empowerment zone employment credit;
  • the credit for employer social security and Medicare taxes paid on certain employee tips;
  • the biodiesel and renewable diesel fuels credit;
  • the new markets credit;
  • the credit for small employer pension plan start-up costs;
  • the credit for employer-provided childcare facilities and services;
  • the low sulphur diesel fuel production credit;
  • the qualified railroad track maintenance credit;
  • the distilled spirits credit;
  • the energy efficient home credit;
  • the alternative motor vehicle credit;
  • the alternative fuel vehicle refuelling property credit;
  • the credit for employer differential wage payments;
  • the carbon dioxide sequestration credit;
  • the qualified plug-in electric drive motor vehicle credit;
  • the credit for small employer health insurance premiums; and
  • the employer credit for paid family and medical leave.

2.2 Is relief available for corporate reorganisations or intra-group transfers of companies and other assets? Please include details of any participation regime.

Under Section 368 of the Internal Revenue Code, corporate reorganisations under Section 368(a)(1), if qualified, are tax free to the participating corporations.

To qualify for Section 368 tax-free reorganisation, a corporate taxpayer will need to show that the transaction meets the requirements of:

  • ‘continuity of interest', which means that the shareholders of the acquired company become the shareholders of the acquiring company; and
  • ‘continuity of business enterprise', which means that it will either:
    • continue to operate the ‘historic business' of the acquired company; or
    • use the acquired company's business asset to operate another business.

If the acquired company has more than one line of business, the acquiring company is only required to continue the most significant line of the business.

2.3 Can a taxpayer elect for alternative taxation regimes (eg, different ways to calculate the taxable base, such as revenue-based versus profits based or cash basis versus accounts basis)?

A corporate taxpayer can use either the cash basis method or the accrual method to calculate its taxable base. The main difference between these two accounting methods is the timing of when revenue and expenses are recognised.

The cash method recognises revenue and expenses when payment is received for the goods or services. In contrast, the accrual method focuses on the anticipation of the revenue and expenses: the income and expensed are included or recognised when the business transaction occurs, instead of when the payment is made or received.

2.4 What are the rules for taxing corporates with different functional or reporting currency from that of the jurisdiction in which they are resident?

Under the US tax rules, a corporate taxpayer must report its income and tax liability on its US tax returns in US dollars.

Other than certain qualified business units, the US dollar is the functional currency for all taxpayers. Therefore, if a corporate taxpayer receives income in foreign currency, the taxpayer must translate the foreign currency into US dollars. If the functional currency is the US dollar, the taxpayer must make all income tax determinations – such as income and expenses – in dollars.

The only exception to the use of the US dollar as the functional currency is where the taxpayer is a qualified business unit, which is a separate and clearly identified unit of a trade or business that maintain separate books and records. Qualified business units can use a foreign currency as functional currency if the taxpayer meets the following four requirements:

  • It conducts the business in a foreign currency other than the US dollar;
  • It does not have a principal place of business in the United States;
  • It is required to use the currency of a foreign country; and
  • It keeps its books and records in the currency of the jurisdiction in which a significant part of the business activities is conducted.

In in such cases, the taxpayer can make the income tax determinations in a foreign currency and then translate the US tax liability into US dollars on its US income tax return.

2.5 How are intangibles taxed?

The corporate owner of intangibles (eg, patents, copyrights and trademarks) is taxed at the time of receiving income from the use of such intangibles in a trade or business and also at the time of the sale or transfer of such intangibles. If the intangible in question was acquired for use in a trade or business, income derived therefrom is ordinary in nature; but when sold as part of a business asset, the tax treatment of the gain will be capital under Section 1231 of the Internal Revenue Code. Similar to other capital assets, the income derived from the sale or exchange of an intangible may be taxed as a capital gain. However, if the taxpayer developed the intangible, income derived from its sale may be considered ordinary income. Further, the corporate owner of an acquired intangible can choose to amortise the cost and recover the cost of such intangible.

2.6 Are corporate-level deductions available for contributions to pensions?

US corporate entities are allowed to take certain deductions for contributions made to fund certain retirement benefits. The rules governing such contributions (and deductions) are contained in the Employee Retirement Income Security Act of 1974 (ERISA) and a taxpayer must satisfy the provisions of ERISA in order to qualify for the deduction.

Corporate employers generally have two types of available plans:

  • benefit plans under which the retirement benefits payable to employees begin at such employee's retirement and continue for life; and
  • defined contribution plans such as those usually offered as so-called ‘401(k) plans', and profit-sharing plans, under which the employees' benefits are based on the value of their individual accounts.

Non-profit corporate entities, including charities and government entities, may offer similar retirement plans, although different requirements may apply.

2.7 Are taxpayers from different sectors (eg, banking) subject to different or additional taxes or surtaxes?

A corporate taxpayer may be subject to additional surtaxes (eg, excise tax) due to the nature of its business activities. At the federal level, the government imposes excise taxes on a wide range of goods and services, such as:

  • air transportation;
  • gasoline and diesel fuel used for transportation;
  • firearms and ammunition manufacturing;
  • vaccines;
  • alcohol; and
  • tobacco.

Federal excise tax rates vary based on the corporate taxpayer's business activities. In addition, states and cities impose their own excise taxes on certain goods and services.

2.8 Are there other surtaxes (eg, solidarity surtax, education tax, corporate net wealth tax, remittance tax)?

Other than federal corporate income tax, US corporate entities are subject to other federal and state level taxes, including the following, among others:

  • customs duties and import tariffs;
  • excise taxes on a wide range of goods and services;
  • stamp taxes (these are also referred to as real property transfer tax in some state and local jurisdictions);
  • capital gains taxes;
  • accumulated earnings tax (20% of ‘accumulated taxable income');
  • personal holding company taxes (20% of undistributed personal holding company income);
  • payroll taxes:
    • federal income tax withholding;
    • Federal Insurance Contributions Act taxes (ie, social security, Medicare and Additional Medicare); and
    • federal unemployment tax; and
  • environmental tax (imposed on importers, manufacturers and sellers of ozone-depleting chemicals (ODCs) or imported products manufactured using ODCs).

2.9 Are there any deemed deductions against corporate tax for equity?

There is an Internal Revenue Service (IRS) provision analogous to the concept of deemed ‘equity' deduction against corporate income tax, which is called a ‘tax dividend exclusion'. This is an IRS rule that allows a certain proportion of a dividend received by a corporation to be excluded when computing the corporation's taxable income. The goal is to avoid double taxation of the same income in the hands of the corporate taxpayer. This rule is analogous to the ‘equity' deduction because such deductions apply only to corporations and their investments in other corporations.

The exclusion is distinct and separate from the dividend received deduction (DRD), because the goal of the DRD is to avoid triple taxation – once in the hands of the earning corporation, followed by another tax at the corporate dividend recipient and a final tax on potentially an individual recipient.

Prior to the introduction of the Tax Cuts and Jobs Act, the IRS allowed a domestic corporation to exclude:

  • 70% of the dividend if it owned less than 20% of the shares of the paying corporation;
  • 75% if the ownership was between 20% and 79%; and
  • 100% if the ownership was 80% or more.

The Tax Cuts and Jobs Act has changed the proportions deducted to:

  • 50% for an ownership interest of less than 20%; and
  • 65% for an ownership of 20% or more.

3 Investment in capital assets

3.1 How is investment in capital assets treated – does tax treatment follow the accounts (eg, depreciation) or are there specific rules about the write-off for tax purposes of investment in capital assets?

For investment in capital assets, a corporate taxpayer can recover the cost of acquiring the capital assets through:

  • depreciation (for tangible assets);
  • amortisation (for intangible assets); and
  • depletion (in the case of natural resources).

In most cases, any of the above forms of cost recovery is made for several years until the cost is fully recovered.

In addition, Section 179 of the Internal Revenue Code allows taxpayers (including corporate taxpayers) to elect to expense the cost of tangible personal assets in the year that such assets are placed in service. The covered personal property includes equipment and machinery for use in the taxpayer's trade or business. Under the Tax Cuts and Jobs Act, if the taxpayer so elects, it can also deduct the cost of certain ‘qualified real property"', defined as certain ‘improvements' to non-residential property. The act increased the limit of the deduction from $500,000 to $1 million.

3.2 Are there research and development credits or other tax incentives for investment?

In the United States, each level of the government – federal, state and local – provides tax incentives to encourage business investment in their jurisdictions. Tax incentives are generally tax credits and tax exemptions given by the government to reduce the corporate taxpayer's US tax liability. The categories of tax incentive include the following, among others:

  • foreign tax credits;
  • general business credits;
  • employment credits;
  • research and development credits;
  • orphan drug credits;
  • inbound investment incentives; and
  • qualified private activity bonds.

The jurisdictions (federal, state and local) each administer their own incentives and, in fact, compete with each other in their efforts to attract investment. Some investment incentives have been codified by the various government authorities and may be referred to as ‘statutory incentives', which create an entitlement. Other incentives are basically discretionary and do not create any type of entitlement. Discretionary investment incentives are for the most part negotiable and may come with conditions precedent or subsequent. If a foreign investor wishes to invest in the United States, it is advisable to contact a local tax planner; only those that work with inbound investors may be aware of the most beneficial incentives, as these incentives are sometimes based on industries or trades that the government wishes to encourage.

3.3 Are inventories subject to special tax or valuation rules?

Section 263A of the Internal Revenue Code – the uniform capitalisation rule – generally requires a corporate taxpayer to capitalise its direct and indirect costs and allocate the same in its inventory for tax purposes if the goods are produced or acquired by the taxpayer for sale. The capitalisation of these costs (or the addition of the costs to the inventory) enables the taxpayer to recover those costs as the inventory is sold. The Tax Cuts and Jobs Act revised the applicability of the uniform capitalisation rules to taxpayers by creating a threshold under which it will apply. The revisions include changes to:

  • the availability of cash method of accounting;
  • the methods of accounting for inventories; and
  • the exemption of certain producers and resellers from being subject to the rule.

Corporate taxpayers can also use a variety of facts-and-circumstances methods to allocate the Section 263A costs, such as:

  • the specific identification method;
  • the burden rate; and
  • the standard cost method.

Many taxpayers choose the standard cost methods as it is a much easier way to allocate the additional Section 263A costs and adjust the book-to-tax differences.

3.4 Are derivatives subject to any specific tax rules?

The tax rules that apply to derivatives depends on whether the taxpayer is an investor, dealer or a trader regarding the purchase and the sale of the derivatives. Thus, there are two ways in which taxation of a derivative can be different:

  • the timing of the recognition; and
  • the character of the derivative.

Timing involves when the gain or loss from the derivative is taxed. In some cases, this is when the asset is sold; in others, at the end of each year (called ‘mark-to-market' or pre-computation of value at the end of the year to tax the gain or loss, if the asset value has decreased). The character of the income depends on the intent of the taxpayer in purchasing the derivative. If held as inventory (dealer or trader), the income derived is ordinary in nature subject and subject to the prevailing tax rate of ordinary income. However, if the taxpayer purchased the inventory in the hope that its value would increase with the passage of time, it will be considered an investment property and will be subject to capital gains tax when sold.

For investors of derivatives (those who buy and sell derivatives for investment instead of as a trade or business), the sale of derivatives will result in capital gains or losses, which will be subject to capital loss limitations described in the Section 1211(b) and Section 1091 wash-sale rules. Commissions and other costs of acquiring or disposing of derivatives are not deductible, but must be included in the calculation of the cost basis of the asset when the property is sold.

For derivatives brokers (those that purchase or sell derivatives to their customers in the ordinary course of their trade or business), the income is treated as ordinary income generated from marketing securities for sale and providing services to their customers. The derivative broker must maintain records of the derivatives purchased as part of its trading activity. The holding of derivatives is treated slightly differently from other types of inventory: the broker must report its derivatives' gains and losses using mark-to-market (which calculates gains and losses by comparing the acquisition cost to the current market value/price of the derivatives.

4 Cross-border treatment

4.1 On what basis are non-resident corporate entities subject to tax in your jurisdiction?

A non-resident corporate entity is generally subject to tax on its US source business income if the foreign corporate entity has a permanent establishment in the United States. Under US tax law, a ‘permanent establishment' is defined as a ‘fixed place' from where business is conducted. The fixed place of business could be an agent's fix place of business. Certain income that are considered passive income also could result in the taxation of a non-resident. Typical examples include:

  • gains generated from real property with situs in the United States;
  • passive income generated from intangible property (eg, patents or copyrights) used in the United States; and
  • dividends distributed by a US company.

4.2 What withholding or excise taxes apply to payments by corporate taxpayers to non-residents?

Non-resident corporations are subject to tax on their US source income. There are two types of tax on US derived income:

  • a tax on business income of a non-resident that is ‘effectively connected' to the conduct of a trade or business in the United States (ECI); and
  • a tax on fixed or determinable, annual or periodic income (FDAP) – basically, passive income.

ECI is income generated from trade or business within the United States. The non-resident corporate taxpayer is subject to tax at the same graduated rates as US corporations. Passive investment income (eg, interest, dividends, rents or royalties) is taxed at a flat rate of 30%, unless a tax treaty specifies a lower rate.

Excise taxes are generally levied within the country and are generally passed on to consumers, and therefore may not be levied on non-resident corporations.

4.3 Do double or multilateral tax treaties override domestic tax treatments?

For non-resident corporations, an applicable double/multilateral tax treaty between its resident country and the United States can often help to reduce or eliminate its US tax liability, but it does not necessarily override domestic tax law. In the United States, one way that domestic tax law retains the power to impose tax on US citizens is through the ‘saving clause', which is found in all US income tax treaties. This rule is illustrated by a recent Tax Court Case involving a US citizen who emigrated to Israel and argued that the US-Israel double tax treaty overrode domestic tax law that would tax his gain from disposition of property. See Cole v Commissioner, TC Summary Opinion 2016-22.

The savings clause in that treaty read as follows: "Notwithstanding any provisions of this Convention except paragraph (4), a Contracting State may tax its residents (as determined under Article 3 (Fiscal Residence)) and its citizens as if this Convention had not come into effect." The Tax Court upheld the cited savings clause as authority that a double tax treaty did not override domestic law unless any exception is noted in the treaty.

4.4 In the absence of treaties, is there unilateral relief or credits for foreign taxes?

Under the US worldwide tax system, if a US corporate taxpayer pays a higher foreign tax on its foreign source income, the taxpayer can choose whether to take the excessive foreign taxes (foreign taxes less US taxes) as credits or as deductions towards its US income tax liability.

While a foreign tax credit (FTC) reduces the corporate entity's US income tax liability dollar for dollar, a deduction reduces US income tax liability at the marginal rate of the taxpayer. Corporate taxpayers can potentially switch from deduction to credit at any time in a 10-year period starting from the time in which the foreign taxes were paid or accrued. Generally, an FTC may be carried back one year or carried forward 10 years.

To claim an FTC, a corporate taxpayer must prove that the claimed foreign taxes meet four basic requirements:

  • The tax is imposed on the corporation;
  • The corporation have paid or accrued the tax;
  • The tax is an actual foreign tax liability; and
  • The tax is an income tax or a tax in lieu of an income tax.

4.5 Do inbound corporate entities obtain a step-up in asset basis for tax purposes?

Generally, corporations carry the assets in their books at cost. In the event that an inbound corporate entity acquired the shares of a domestic company solely or partially in exchange for its own shares, such a transaction may be tax free if the requirements of a tax-free exchanges are met. Section 368 specifies the types of corporate ownership exchanges that would be tax free. In the event that an inbound investment is tax free, the cost basis of the assets of the acquired corporation would be assumed by the foreign investor. This means that the assets would retain their historical cost basis, reduced by any depreciation or amortisation taken by the previous owner.

If the foreign investor instead purchased the assets it planned to use for its inbound business, the assets' basis would be their fair market value unreduced by prior any prior depreciation or amortisation.

To alleviate the problem that naturally flows from the inability to obtain fair market value cost basis in a tax-free exchange, there is a rule that allows an acquirer of property in a tax-free exchange to step up the cost basis of the property to its fair market value on the date of acquisition. See Section 338(h)(10) of the Internal Revenue Code. This optional step-up in basis is elective.

4.6 Are there exit taxes (for disposed-of assets or companies changing residence)?

Under the current US tax rules, there are no additional exit taxes imposed when corporations change their residences or place of incorporation. Section 7874 of the Internal Revenue Code governs corporate inversions or tax inversions. It does not penalise a corporate taxpayer for changing its place of incorporation if the inversion is not motivated by tax because changing a corporate place of incorporation is not considered tax evasion. However, corporations in the United States sought to reincorporate overseas due to worldwide taxation of their income. That does not seem to be the case, or it is not as much the case now as it was prior to 2018. Foreign corporations (ie, corporations with foreign parents) that wish to leave the United States will be subject to tax on any gain derived from the sale or exchange of their business (through either asset or stock sale). If, however, the place of incorporation of the US subsidiary changes, but all other things stay equal, then there would not be any exit tax.

5 Anti-avoidance

5.1 Are there anti-avoidance rules applicable to corporate taxpayers – if so, are these case law (jurisprudence) or statutory, or both?

Both statutory and case law anti-avoidance rules apply to corporate tax taxpayers in the United States, but there is no statutory general anti-avoidance rule. The rules that exist has been put together over time based on taxpayer actions. The most common (but non-exhaustive) anti-tax avoidance rules in the United States are as follows:

  • thin capitalisation rules;
  • transfer pricing;
  • substance over form;
  • step transaction;
  • economic substance over form;
  • limitation on hybrid entities; and
  • Foreign Account Tax Compliance Act.

However, the Tax Cuts and Jobs introduced a base erosion and anti-avoidance tax (BEAT). The BEAT is designed as a minimum tax imposed on large corporations (defined as corporations with annual average receipts of $500 million or more) that satisfy certain conditions. The goal is to prevent corporations (foreign and domestic) that are doing business in the United States from avoiding US taxes by shifting their profits offshore. Mechanically, it requires certain corporations (large corporations) to pay a minimum tax on their taxable income without deducting certain payments to their foreign affiliates. See Section 59A of the Internal Revenue Code and the Final Regulations thereunder.

5.2 What are the main ‘general purpose' anti-avoidance rules or regimes, based on either statute or cases?

The main purpose of the anti-avoidance rules is to prevent tax base erosion. With the anti-avoidance rule, the tax authority could deny a corporate taxpayer's deduction of certain payments (eg, interest, royalties, service payments) made to its foreign affiliate on the basis that such payment lacks economic substance and that the purpose of the payment is merely to shift profit to a lower-tax jurisdiction

5.3 What are the major anti-avoidance tax rules (eg, controlled foreign companies, transfer pricing (including thin capitalisation), anti-hybrid rules, limitations on losses or interest deductions)?

Under the current US tax laws, the major anti-avoidance tax rules include, but are not limited to the following:

  • The thin capitalisation rules (earnings stripping) prevent a corporation from creating deductions in the United States and shifting income into lower-tax jurisdictions through inter-company debt. Under the new thin capitalisation rules, net business interest expense deduction is limited to 30% of adjusted taxable income. It allows a carry-forward of the balance indefinitely.
  • The transfer pricing rules permit the Internal Revenue Service (IRS) to reallocate the income or expenses of a corporation in order to reflect the amounts that would have resulted had the transaction been conducted at arm's length instead of between related companies.
  • The substance over form doctrine permits the IRS to examine the true intent of a transaction without following the legal form of the entity. The purpose of this doctrine is to prevent corporate taxpayers from structuring a transaction solely for tax avoidance reasons. The doctrine is often combined with the step transaction doctrine, which can treat a corporate taxpayer's series of transactions as one single integrated event, thus changing the tax treatment.
  • The economic substance doctrine allows the IRS to review transactions and potentially disallow the transaction based on its lack of economic substantial purpose other than reduction of tax liability.

5.4 Is a ruling process available for specific corporate tax issues or desired domestic or cross-border tax treatments?

Yes. Under US tax law, taxpayers have the right to request a ruling from the IRS on the interpretation of the tax law, as applicable to any specific factual situation.

The most common of these rulings is the private letter ruling (PLR). The PLR is a written statement issued by the IRS interpreting tax laws on the taxpayer's presented set of facts. A PLR is generally issued in response to a written request submitted by a taxpayer and thus may not be relied on as precedent by other taxpayers or the IRS personnel.

5.5 Is there a transfer pricing regime?

Yes. The US transfer pricing regime is established based on the arm's-length principle, which is the most recognised standard worldwide. The goal of the arm's-length principle is to replicate transactions between unrelated parties under similar circumstances. Under Section 482 of the Internal Revenue Code, the IRS has the authority to reallocate/adjust the income or expenses of related parties if it believes that the transaction does not conform to the arm's-length standard. In reality, since the facts and circumstances in each transaction are unique, the IRS will determine whether the transaction between related parties meets the arm's-length standard based on the ‘best method' rule. Corporate taxpayers are free to choose the transfer pricing method that they wish to use to evaluate their transactions with their affiliates. However, the IRS is not bound by such determination.

The onus, therefore, of proving the suitability of any method for the transaction in question is that of the taxpayer. Corporate taxpayers could also enter into an advance pricing agreement with the IRS to avoid any potential transfer pricing penalties or issues with the methodology.

5.6 Are there statutory limitation periods?

Generally, the statutory limitation period is three years for the tax authority to make tax assessments on a return that is due or filed. In addition, taxpayers are limited to three years, from the date of filing their tax return (excluding the extension), for any claims relating to a credit or refund. If the taxpayer fails to disclose income on which tax may be imposed, there will be no limitation period, since the limitation period begins from the date of reporting or disclosure of the income.

In addition, each tax assessment has a collection statute expiration date. Section 6502 of the Internal Revenue Code provides that the length of the period for collection after assessment of a tax liability is 10 years. The collection statute expiration ends the government's right to pursue collection of a liability.

6 Compliance

6.1 What are the deadlines for filing company tax returns and paying the relevant tax?

According to the Internal Revenue Service (IRS) Tax Calendar (2021), corporations must file tax returns for and pay any taxes due by 15 April 2021. A corporate taxpayer that seeks an extension to file its tax return can request an extension (Form 7004), which will give it an automatic six-month extension of time to file the tax return. However, the corporate taxpayer must deposit the estimated tax owed to the IRS along with Form 7004 by the due date (15 April).

6.2 What penalties exist for non-compliance, at corporate and executive level?

The US tax authority may choose to apply criminal penalties and/or civil penalties to business taxpayers at both the corporate and executive level for failure to follow the rules of the Internal Revenue Code.

The civil penalty provisions are divided into four categories:

  • delinquency penalties;
  • accuracy-related penalties;
  • information reporting penalties; and
  • preparer or promoter penalties.

Criminal penalties can be imposed on a corporate taxpayer and its executives if failure to comply with the Internal Revenue Code is wilful and intentional.

6.3 Is there a regime for reporting information at an international or other supranational level (eg, country-by-country reporting)?

The US tax system is still partially a worldwide taxation system; therefore, the IRS requires a US corporate taxpayer that has operations worldwide to report its income (both passive and direct) generated in each country. The Tax Cuts and Jobs Act introduced a 100% participation exemption that applies to active business income, but not to passive income.

At the international level, the Organisation for Economic Co-operation and Development (OECD) has been working with countries all over the world to develop an international tax structure that addresses global tax issues such as tax evasion, tax havens and tax avoidance by multinational corporations.

The United States is a member of the OCED, and the Internal Revenue Service also collaborates with tax authorities of other OCED members through bilateral competent authority arrangement/procedures aimed at improving cross-border tax compliance and information exchanges, such as the Foreign Account Tax Compliance Act and exchanges of annual country-by-country reports.

7 Consolidation

7.1 Is tax consolidation permitted, on either a tax liability or payment basis, or both?

Commonly controlled corporations or affiliated group of corporations, consisting of a US parent company and US subsidiaries (defined as a direct or indirect ownership interest of 80%) can elect to file a consolidated federal income tax return to compute the tax liability and make payment for the whole affiliated group. Generally, foreign subsidiaries of US parent companies cannot be consolidated into the US group, unless the foreign incorporated subsidiaries meet certain exceptions.

8 Indirect taxes

8.1 What indirect taxes (eg, goods or service tax, consumption tax, broadcasting tax, value added tax, excise tax) could a corporate taxpayer be exposed to?

Unlike most countries in the world, the United States does not impose indirect taxes or value added tax/goods and services tax at the federal level. Instead, states and local municipal governments levy the indirect taxes, such as:

  • sales and use tax;
  • franchise taxes;
  • real estate transfer taxes;
  • telecommunications taxes; and
  • commercial rent taxes.

Therefore, the list of all indirect taxes to which an inbound corporate taxpayer is subject will largely depend on its business activities and the jurisdiction of its business nexus. For example, a hotel operating in San Francisco, California will be exposed to indirect taxes imposed by both the state (California) and local government (San Francisco), such as:

  • California franchise tax (due to the location of doing business);
  • California employment insurance tax (due to its hiring of employees); and
  • hotel occupancy taxes imposed by the city of San Francisco where the hotel is located (due to the nature of its business).

8.2 Are transfer or other taxes due in relation to the transfer of interests in corporate entities?

If the transfer of interest in a corporation is considered a sale or exchange of the shares for cash or cash equivalents or asset, there is a tax due which is computed as the difference between the tax basis of the shares (assuming that it is a corporate seller) and the fair market value. The sale can also be tax free to the extent that money is not exchanged; an example is an exchange that does not involve the payment of cash or cash-equivalents. Section 368 and related sections of the Internal Revenue Code provide that the transfer of interests (shares) in a corporate entity that involves only the exchange of stock will be tax free if it meets certain requirements.

9 Trends and predictions

9.1 How would you describe the current tax landscape and prevailing trends in your jurisdiction? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?

The Trump administration reformed the US corporate tax considerably by lowering the corporate tax rate from 35% to 21% and establishing a new tax on intangibles (eg, patents), called global intangible low-taxed income (GILTI), the goal of which appears to be to prevent profit shifting to low-tax jurisdictions. In essence, the United States moved from its erstwhile worldwide taxation to a territorial regime with a reduced corporate tax rate.

The GILTI tax rate is 10.5% (half of the current corporate tax rate) and, at a very high level, is imposed only when the foreign jurisdiction's tax rate is less than 13.125%. Passive income of multinationals is still subject to US income tax.

The new Biden administration is poised to change the US corporate income tax landscape again, probably within the next 12 months, with the American Jobs Plan. According to the US Department of the Treasury, the goal of the proposed plan is to make "American companies and workers more competitive by eliminating incentives to offshore investment, substantially reducing profit shifting, countering tax competition on corporate rates, and providing tax preferences for clean energy production" (Made in America Tax Plan Report, 27 April 2021).

One of the proposed changes is to raise the corporate tax rate from the current 21% to 28%. The plan goes further by revising the GILTI tax rate back to 21% (thus denying the 50% deduction allowed by the Tax Cuts and Jobs Act).

Another innovation in the Biden tax plan is the 15% minimum tax on book income. The goal of this tax is to ensure that corporations that report high profits to their shareholders pay a minimum tax. It appears that corporations that are subject to the minimum tax could still lower this tax with certain credits, such as the R&D and foreign tax credit. Only a few US corporations and multinationals would seem to be affected, since the triggering income has been raised from $100 million to $2 billion.

The Biden corporate tax plan is still a proposal and has not been presented to Congress for consideration; but there is reason to believe that the Biden administration will take steps to enact the changes because of the looming mid-term election, which could usher in a Republican majority in the Senate.

10 Tips and traps

10.1 What are your top tips for navigating the tax regime and what potential sticking points would you highlight?

The American Jobs Plan (see question 9.1) would appear to be a continuation of the prior administration's policy with regard to the territorial tax regime. Prior to the Tax Cuts and Jobs Act, US multinationals were incentivised to postpone repatriating their profits because of the worldwide taxation of their income. The worldwide taxation regime placed US multinationals at a competitive disadvantage, since multinationals from other countries could earn foreign income free from tax from their home country. The territorial tax regime undercuts ‘inversion' transactions (reincorporation of US domestic corporations offshore to avoid US tax), which became popular in the United States partly as a result of the worldwide taxation of corporate profits. For US corporations seeking to invest overseas, the territorial tax regime – which seems destined to remain – ensures that taxation is less of a consideration in the decision to venture offshore.

US multinationals that meet the requirement for the 15% minimum tax may also have less to worry about, because the tax can be reduced by certain credits (eg, foreign tax and R&D credits). It would appear that this tax has been defanged even before it has been enacted. Thus, it would seem that the (intended) goal of the minimum tax is not only to ensure that large corporations pay a minimum tax, but also to redirect investment towards R&D.

The Biden tax plan also creates opportunities for the development of renewable energy. It appears that companies, inbound and outbound, that focus on renewable energy will get a renewed boost in subsidy, while companies in the fossil industry will lose their favoured place in government subsidisation. The US Treasury Department in its Made in America Tax Plan Report suggests that US subsidisation of the fossil fuel industry has been the primary reason why energy companies have focused on the production of fossil fuel as opposed to renewable energy. Based on the Biden administration's renewed focus on cleaner energy, companies that had previously abandoned their efforts in the clean energy sector may pivot back to these, as the renewed focus on the environment should foster the growth of these industries.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.