United States

Corporate - Group taxation

Last reviewed - 07 February 2024

An affiliated group of US 'includible' corporations, consisting of a parent and subsidiaries directly or indirectly 80% owned, generally may offset the profits of one affiliate against the losses of another affiliate within the group by electing to file a consolidated federal income tax return. A foreign incorporated subsidiary may not be consolidated into the US group, except for (i) certain Mexican and Canadian incorporated entities, (ii) certain foreign insurance companies that elect to be treated as domestic corporations, and (iii) certain foreign corporations that are considered ‘expatriated’ under the so-called ‘anti-inversion’ rules and are thus deemed to be domestic for income tax purposes. A partnership may not be included in a consolidated return, even if it is 100% owned by members of an affiliated group, since a partnership is not a corporation. However, a member's earnings that flow through from a partnership are included as part of the consolidated group's taxable income or loss. Filing on a consolidated (combined) basis is also allowed (or may be required or prohibited) in certain states.

Sales, distributions, and other transactions between corporations that are members of the same group generally are deferred until such time as a transaction occurs with a non-member of the group. Losses incurred on the sale of stock of group members are disallowed under certain circumstances.

Transfer pricing

Transfer pricing regulations govern how related entities set internal prices for the transfers of goods, intangible assets, services, and loans in both domestic and international contexts. The regulations are designed to prevent tax avoidance among related entities and place a controlled party on par with an uncontrolled taxpayer by requiring an arm's-length standard. The arm's-length standard generally is met if the results of a controlled transaction are consistent with results that would have been realised if uncontrolled taxpayers had engaged in a similar transaction under similar circumstances. If a company is not in compliance with the arm's-length standard, the IRS may raise taxable income and tax payable in the United States. After a transfer pricing adjustment, a multinational company may face double tax, paying tax twice on the same income in two countries. Multinational companies may request competent authority relief from double taxation through a tax treaty.

In order to avoid potential transfer pricing penalties, one avenue available to companies may be to obtain an advance pricing agreement (APA) with the IRS, unilaterally, or with the IRS and another tax authority, bilaterally, covering inter-company pricing.

Country-by-country (CbC) reporting

US multinational enterprises (MNEs) have to report certain financial information on a CbC basis. The CbC report will be exchanged under bilateral Competent Authority Arrangements (CAAs) negotiated between the US Competent Authority and foreign tax administrations.

Under final regulations issued by the IRS, parent entities of US MNE groups with USD 850 million or more of revenue in a previous annual reporting period file IRS Form 8975, Country-by-Country Report. Form 8975 is used to report a US MNE group’s income, taxes paid, and other indicators of economic activity on a CbC basis.

Form 8975 must be filed with the income tax return of the parent entity in which the reporting period ends and cannot be filed as a stand-alone return. Form 8975 and its schedules can be filed in the Modernized e-File (MeF) XML schema format. Parent entities not permitted to file returns electronically must file Form 8975 with their paper income tax return.

The IRS will exchange Form 8975 information automatically with tax authorities with which the United States enters into a bilateral CAA. However, a US MNE group’s information will be exchanged only with countries in which the US MNE group reports doing business. Exchanged information is confidential and protected pursuant to the applicable legal instrument permitting exchange.

Thin capitalisation

See Interest expenses in the Deductions section.

Controlled foreign companies (CFCs)

Under the Subpart F regime of the IRC, a CFC is any foreign corporation with respect to which US shareholders (defined below) own more than 50% of either the voting power of all classes of stock entitled to vote or the total value of all classes of the corporation’s stock on any day during the foreign corporation’s tax year. For these purposes, a US shareholder is any US person owning (directly, indirectly through foreign intermediaries, or constructively) 10% or more of the total value of shares of all classes of stock or of the total combined voting power of all classes of stock entitled to vote of a foreign corporation.