Page 295 - TaxAdviser_2022

a mutual agreement procedure (MAP)
Resolve discrepancy between tax accounts and cash accounts through
case under an income tax treaty.
secondary adjustment
A secondary adjustment reflects
an inferred secondary transaction that
resolves the discrepancy caused by the
primary adjustment and the correspond- Corresponding adjustment:
ing adjustment between the taxpayer’s Decrease to taxable income Foreign parent
cash accounts and tax accounts. More under MAP settlement Secondary
specifically, the inferred secondary trans- adjustment:
action is deemed to have taken place to Deemed dividend
produce the result that, if the primary
Primary adjustment:
transaction had been conducted at arm’s US subsidiary
Increase to taxable income
length, the outcome in the cash accounts
would be identical to the actual profit al-
location between the related parties.
Secondary transfer-pricing adjust-
ment rules vary among tax jurisdictions, and Cash Accounts Through Secondary directly between the parties regardless
and in fact, most jurisdictions do not Adjustment.”) The deemed distribution of the ownership structure; see Foley,
impose secondary adjustments. For may have tax consequences. Under Sec. Taheri, and Sullivan for further details.)
example, the United States, Canada, 881, the related party would be subject
Germany, and India have second- to a 30% tax liability on the distribution, Deemed loan
ary adjustment rules, but the United and under Sec. 1442, the U.S. company An alternative characterization of a
Kingdom, Japan, and Australia do not. would be a withholding agent required secondary transfer-pricing adjustment
This item focuses on the United States to withhold the tax. is a deemed loan. The taxpayer may
and rules promulgated under Regs. Sec. treat the entity in the jurisdiction in
1.482-1(g)(3) and Rev. Proc. 99-32. A Deemed capital contribution which taxable income is increased by
global survey of secondary adjustment In contrast, if the U.S. company directly the primary transfer-pricing adjustment
rules is provided by Foley, Taheri, and or indirectly owned stock in the foreign as having made a loan to the related
Sullivan, “Country-by-Country Survey related party, then a deemed transaction party. The repayment of the loan to
of Global Secondary Adjustment Rules,” that results in an identical outcome in the entity with the increased income
103 Tax Notes International 29 (July 5, the cash accounts would be a capital matches the cash and tax accounts.
2021). contribution from the U.S. company to Importantly, as the repayment of
As discussed below, an inferred sec- its related party. The deemed contribu- a loan does not create income or a
ondary transaction may be in the form tion increases the U.S. company’s basis deduction, this deemed loan transaction
of a deemed dividend, a deemed capital in the related company’s stock and can together with the actual repayment
contribution, or a deemed loan. have an impact on subsequent distribu- eliminates most tax consequences of
tions and capital gains income recogniz- the secondary adjustment, particularly
Deemed dividend able and reportable by the U.S. company. any withholding tax associated with a
For example, suppose a primary transfer- If the U.S. company and the for- deemed dividend. In the United States,
pricing adjustment increases the taxable eign related party are not related by this characterization may be allowed
income of a U.S. company. If the related direct or indirect stock ownership (e.g., under certain conditions in accordance
party that recorded the excess income “sibling companies” with a common with Rev. Proc. 99-32. The deemed
prior to the primary adjustment owns stockholder or parent company), then loan must be repaid within a certain
stock directly or indirectly in the U.S. a deemed transaction that results in an period, typically 90 days from the
company (e.g., a foreign parent com- identical outcome in the cash accounts primary adjustment, and interest must
pany), then a deemed transaction that would involve both a distribution and be recognized over the deemed period
results in an identical outcome in the a subsequent capital contribution. This of the loan, i.e., from the last day of the
cash accounts would be a dividend dis- would entail the direct and indirect tax year to which the primary adjustment
tribution from the U.S. company to its consequences associated with the same. relates.
related party. (See the diagram “Resolve (In some jurisdictions, however, a distri- Direct and indirect tax conse-
Discrepancy Between Tax Accounts bution or contribution may be deemed quences of secondary transfer-pricing

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