Reforming the Branch Profits Tax to Advance Neutrality

76 Pages Posted: 17 Dec 2007 Last revised: 6 Jan 2008

See all articles by Fred B. Brown

Fred B. Brown

University of Baltimore - School of Law


Congress enacted the branch profits tax in order to reduce the disparity between the taxation of U.S. subsidiaries and U.S. branches of foreign corporations. The branch profits tax attempts to promote neutrality by subjecting the U.S. branch earnings of a foreign corporation to a second level of U.S. tax upon the deemed remittance of the earnings outside of the U.S. branch. This is to approximate the second-level tax that occurs in the subsidiary setting when a U.S. subsidiary pays dividends to its foreign parent. Unlike the dividend tax in the subsidiary setting, however, the branch profits tax can apply even when all of a foreign corporation's U.S. earnings are retained for use in the operations of the U.S. branch, what some commentators have referred to as a surtax result. Moreover, a typical U.S. subsidiary has greater flexibility in retaining earnings as compared to a U.S. branch. The more burdensome nature of the branch profits tax appears to create a tax bias in favor of operating in the United States through U.S. subsidiaries, so that foreign corporations can control the timing and the impact of the second-level tax.

This Article proposes several changes to the branch profits tax that both promote neutrality and are consistent with other recognized policies governing the taxation of U.S. branches. The Article proposes measures that provide foreign corporations operating through U.S. branches with an ability to control the timing and impact of the second-level tax that is similar to that possessed by foreign corporations operating through U.S. subsidiaries. With these changes, foreign corporations with U.S. branches generally would have a choice of whether to incur a second level tax or instead have the income on invested earnings taxed by the United States on a net basis. Thus, the branch profits tax would function more like the dividend tax in the U.S. subsidiary setting, thereby promoting the neutrality goals underlying the provision.

Suggested Citation

Brown, Fred B., Reforming the Branch Profits Tax to Advance Neutrality. Virginia Tax Review, Vol. 25, No. 4, 2006, Available at SSRN:

Fred B. Brown (Contact Author)

University of Baltimore - School of Law ( email )

1420 N. Charles Street
Baltimore, MD 21218
United States

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