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jgordosea
jgordosea, Enrolled Agent
Category: Tax
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Experience:  I've prepared all types of taxes since 1987.
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for John Gordos, please John, re foreign taxation...Have

Customer Question

for John Gordos, please     John, re: foreign taxation...Have a situation where there is a subsidiary in a foreign country and the parent is here in the USA.    The subsidiary is an accrual corp. The USA parent is cash basis.   Did some rudimentary transfer pricing. The foreign entity just made an accrual that it owes the parent 100k for 2007. Does the USA parent (who is cash basis) have to pick this up as income in 2007...or can it wait until 2008 to reflect the income when it received the cash?   Thank you, Ira             Also, a different client has a company in the Dominican Republic....I believe he told me there is no corporate income tax in that country....do you happen to have a good website or link where one could find out if there are corporate tax returns equired in the Dominica Republic...and if there isn't ....what is an individual in the USA supposed to do on a 5471 filing.   Thank you, Ira
Submitted: 5 years ago.
Category: Tax
Expert:  jgordosea replied 5 years ago.

Greetings and thank you for the request,

 

Please describe the transaction for which the subsidiary accrued the 100K in 2007 in regards XXXXX XXXXX and when the services, or delivery of product or whatever economic performance will (or has) been performed.

 

Also does the 100K include any amount that is held in inventory, was expensed or will be recorded on the books of the parent company for the 2007 that would correspond to the income? In other words, would the delay in reporting the income cause the parent's books to not accurately reflect the actual economic performance for 2007?

 

I do not have; but can look for something in regard to DR corporate taxation within a day or two.

 

Thank you for the additional information.

 

 

 

Customer: replied 5 years ago.
Thank you John. The parent developed a software. The subsidiary in Ireland sets up deals with customers who will pay let's say 25k/yr to license the software and technical support. So if the Ireland sub has 10 of htese customers...that's 250k....1/2 goes to the Parent...that's basically our transfer pricing...as this is comparable to a deal we would cut with an independent company.

The sub owes the Parent 125k....the sub has accrued this expense. The sub is accrual. The US parent is cash basis....does US tax law say if the Parent does have to pick up that income as accrual...or can the Parent wait until it gets money from the Sub. (This is not a consolidated return)





Please describe the transaction for which the subsidiary accrued the 100K in 2007 in regards XXXXX XXXXX and when the services, or delivery of product or whatever economic performance will (or has) been performed.

I'm not totally sure the definition of economic performance. The parent really didn't do any work, however we want to be compliant with the law.

I had a disinclination that the IRS would allow an accrual sub to take a write off and the parent cash basis entity to delay recognition until it gets the $$....sort of seemed like could play into a tax shelter for a year....ie imagine the sub accrued 100 million and the us parent didn't pick up until following year when it received the 100 nmillion...now just delayed tax on a 100 million.

If you have something easily accessible for the DR that would be great

Thanks again,
Ira

Expert:  jgordosea replied 5 years ago.

Hello again,

 

As you may know, the rules for related party transactions are found in IRC section 267

 

While an accrual-basis taxpayer usually takes an expense in the year it accrues, when the expense is owed to a related party who uses the cash basis of accounting, then section 267(a)(2) prevents the deduction for the accrual-basis taxpayer until the year in which the related party includes the amount in gross income, that is, the year of actual payment.

 

There is also a subsection in regard to controlled foreign corporations that says in part:

"...a deduction shall be allowable to the payor with respect to such amount for any taxable year before the taxable year in which paid only to the extent that an amount attributable to such item is includible ( ...) during such prior taxable year in the gross income of a United States person who owns ( ...) stock in such corporation."

 

Please note that a controlled group is defined in section 267 as has the meaning given to such term by section 1563(a), except that "more than 50 percent" is used instead of "at least 80 percent" each place it appears in Section 1563(a), and the determination shall be made without regard to subsections (a)(4) and (e)(3)(C) of section 1563.

 

So, your disinclination is on target; but it works to delay the deduction until the income is included in the gross income of the US person.

 

This answer does not consider the accounting rules that may be required for inclusion of multiple year leases or contracts in the income of the cash basis taxpayer.

 

I hope this helps, as always.

Best regards.

 

 

jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 3005
Experience: I've prepared all types of taxes since 1987.
jgordosea and 6 other Tax Specialists are ready to help you
Customer: replied 5 years ago.
Thank you John, that's a great answer.
Expert:  jgordosea replied 5 years ago.

You are quite welcome.

 

In regard to the DR corporate tax, the article Incorporating in the Dominican Republic has a description of the corporate tax; but I do not have a reference that has more detailed information at this time.

 

Dominican corporations are subject to the following taxes:

(1) Income Tax. The income tax rate for Dominican corporations is a flat 25% on net income. Interest on debt is tax deductible. Law #557-95 temporarily raised the tax rate to 30% for the year 2006, 29% for 2007 and 27% for 2008. In 2009, the tax rate will revert to 25%.

For corporations whose fiscal year coincides with the calendar year, annual tax returns must be filed on or before April 30, even in the case of companies which have no income or business activity. Filings are done at the offices of the Bureau of Internal Taxes ("Dirección General de Impuestos Internos"). For corporations with an authorized capital of RD$50,000 pesos or more, the tax filing must be accompanied by corporate financial statements audited by a Certified Public Accountant.

(2) Tax on Assets. Corporations must pay an annual 1% tax on their assets ("Impuesto sobre Activos"). This tax functions as a kind of minimum tax since amounts paid are deducted from the amount due for corporate income tax.

(3) Value-Added Tax ("Impuesto a la Transferencia de Bienes Industrializados y Servicios - ITBIS") Most corporate transactions are subject to a 16% valued-added tax ("ITBIS").
Corporations must also act as withholding agents for dividends, payroll and other taxes

 

See also An Overview of Dominican Tax Law

 

So, indeed there are several taxes that may be due in teh Dominican Republic.

 

Thank you for the opportunity to be of service, again.

jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 3005
Experience: I've prepared all types of taxes since 1987.
jgordosea and 6 other Tax Specialists are ready to help you
Customer: replied 5 years ago.
<p>Good stuff on DR.</p><p> </p><p>Much appreciated,</p><p>Ira</p>

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