International Tax Law

[calcpa5]

Issue:
I have a client that is 100% owned by an Australian company. The Australian entity told me that they were required by Australian law to accrue revenue from the US company amounting to 107% of expenses incurred by the US subsidiary, resulting in a profit in the US. The company is a biotech company in the development stage and has no revenue anywhere in the world from any external source. But this accounting will result in a profit and tax due in the US.

Question:
Does anyone know the proper tax treatment of the revenue from Australia and if there are any exceptions to recognizing that revenue for US tax purposes?

[Roland Slugg]

Dear calcpa5

I fail to see how a requirement imposed by Australian tax law creates income for U.S. tax purposes.

[Bees Knees]

It appears this is a case where a U.S. subsidiary is owned by an Australian company. The U.S. source income earned by the Australian company would most certainly be subject to U.S. taxation. The question appears to center on a requirement under Australian law to accrue income on the U.S. source income, and whether that affects the way the Australian company is taxed on the U.S. source income.

The only applicable code section I can think of is IRC Section 446(a) that says: “Taxable income shall be computed under the method of accounting on the basis of which the taxpayer regularly computes his income in keeping his books.”

I suppose you could interpret that to mean if Australian law requires this Australian company to keep its books for U.S. source income from its subsidiary under the accrual method, then for U.S. tax purposes, the income must be calculated under the accrual method.

I know there are exceptions to this rule, so I can’t say whether that is your answer. However, it seems moot anyway since Section 448 says a C corporation with gross receipts over $5 million must use the accrual method. So it might be irrelevant what Australian law says. A U.S. subsidiary of a foreign corporation with over $5 million in gross receipts is already required to use the accrual method, regardless of what the foreign government requires of its parent corporation.