Question

LearCo, a non-U.S. conglomerate, generates $4 billion in gross receipts annu-ally. Its U.S. subsidiary, KingCo, accounts for $750 million of the annual gross receipts (and its average annual gross receipts for the last three years is $820 million). KingCo generates U.S. taxable income income of $180 million, after deducting a $350 million management fee that it pays to LearCo. KingCo reports no U.S. tax credits. The corporate income tax rate in LearCo’s country is 14%. What are the tax implications (if any) of this arrangement?

Answer 1

Lear Co. is operating in US through a Subsidiary which is a C Corp and US tax laws permits management Fees as deduction from revenues if they are paid by a C corp subsidiary to a non US parent.

So Tax management provided is question is right and there will not be any tax implication.

On the other hand if Lear Co. was operating in US not through a C Corp but by forming a S corp like branch office in US than this expense of management fess will not be deductible.

Also Management Fess transaction price should be reasonable as between unrelated parties.

So Tax issue in above problem is properly addressed and there will be no tax implication.