Use of U.S. GAAP to calculate the earnings and profits of foreign corporations

Tax Executive, The, March-April, 1991 by Fred T. Goldberg, Jr.

(1) Presumably, the U.S. GAAP E&P proposal would affect only foreign corporations not directly subject to U.S. tax. Foreign corporations directly subject to U.S. tax should compute taxable income in the same manner as domestic companies.

(2) With respect to pre-1987 taxable years, TEI has supported the use of GAAP principles for computing E&P of a foreign corporation in determining the "tax book value" of stock in non-consolidated companies in which a 10-percent or greater interest is held. See Prop. Reg. [section] 1.861-10(b)(5)(ii) (issued Sept. 8, 1987).

(3) As previously stated, we believe it is imperative that no adjustments be required in respect of three items (tax depreciation rules, the uniform capitalization requirements, and the translation of foreign financial statements). Requiring adjustments in respect of other items may affect taxpayers' willingness to elect the method.

(4) In cases where local financial statements are not prepared in accordance with U.S. GAAP, an approach similar to Temp. Reg. [section] 1.56-1T(c)(1), which assigns priorities to various types of financial statements for alternative minimum tax purposes, could be developed.