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Packard, Inc., a domestic corporation, operates a branch in Mexico. Over the las

ID: 2482558 • Letter: P

Question

Packard, Inc., a domestic corporation, operates a branch in Mexico. Over the last 10 years, this branch has generated $30 million in losses. For the last 3 years, however, the branch has been profitable and has earned enough income to entirely offset the prior losses. Most of the assets are fully depreciated, and a net gain would be recognized if the assets were sold. Packard's CFO believes that Packard should incorporate the branch now, so that this potential gain can be transferred to a foreign corporation, thereby avoiding U.S. tax and, as an added benefit, avoiding U.S. taxes on future income. Draft a memo to Samuel Henderson, the CFO, addressing the tax issues involved in the proposed transaction.

Explanation / Answer

Date:                           05-05-2016

From :                         Your name

To:                               Samuel Henderson, CFO, Packard, Inc.

Subject:                      Tax issues involved in the proposed transaction of Incorporating foreign branch

Dear Sir,

I reviwed the proposed transactions in the context of tax regulations present in Unites States. I am hereby happy to bring few issues relating to tax on this transaction into your notice.

There is an issues with this transaction that is Controlled foreign company “CFC” tax issues. As per the rule in United states, any foreign company which will have a control in US, means If it will have an US persons with atleast 10% voting stock of foreign company, and together they own more than 50% of voting stock in foreign company’s outstanding shares, It will be considered as CFC, hence our company in the foreign land will become CFC . And under CFC rules incomes such as gains, dividends, profits etc, are to be taxed in USA. So here by creating a foreign branch, we will be paying tax any how. This issues I would like to bring into your attention. Thanks