Section 882: How Foreign Corps. That Miss a Filing Can Avoid Losing U.S. Tax Deductions
WG&L Journal of International Taxation, 2013
12 Pages Posted: 14 Nov 2015
Date Written: July 1, 2013
Abstract
Generally, a foreign corporation that conducts a trade or business within the United States is taxed on its income that is effectively connected to that trade or business. The effectively connected income is subject to tax at the same graduated tax rates that apply to the income of a U.S. corporation. The tax is imposed on a “net basis,” which means that the foreign corporation may use deductions that are connected to its effectively connected income. As a prerequisite for allowing a foreign corporation to use its deductions, the Internal Revenue Code (“IRC”) requires the filing of a "true and accurate" tax return, which Treasury has interpreted to mean that the foreign corporation must "timely" file to benefit from deductions. IRC § 882 and Treasury Regulation § 1.882-4 provide the rules for when a foreign corporation will be prohibited from claiming deductions on a late-filed return. This article discusses these provisions and how a foreign corporation can avoid this hidden penalty.
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