“DISREGARDED ENTITIES” may become harder to arrange outside the United States.

“DISREGARDED ENTITIES” may become harder to arrange outside the United States.

September 01, 2006

“DISREGARDED ENTITIES” may become harder to arrange outside the United States.

The US Treasury Department is considering a proposal not to allow US companies to treat their offshore subsidiaries as “disregarded entities” for US tax purposes in cases where the subsidiaries are separate business units. The IRS currently lets US companies choose how to classify most subsidiaries as transparent or as separate corporations. A subsidiary that a US company chooses to treat as transparent and that has a single owner is treated as if it is does not exist; it is “disregarded.”

Perhaps counter intuitively, the ability to treat offshore subsidiaries as transparent makes it easier to prevent offshore earnings from being taxed immediately in the United States. US tax can be delayed by keeping the earnings offshore.

Robert Dilworth, a senior Treasury lawyer, said at a Washington luncheon in late April that the proposal is under “active study.” The Congressional Joint Tax Committee recommended last year that Congress could make such a change as a “revenue raiser” in a future tax bill to help pay for other tax cuts that Republicans in Congress want to make. It estimated the change would increase US tax collections over the next 10 years by $1.2 billion in total.

Congress has had an opportunity in at least three tax bills since then to adopt the proposal, but has not done so.

Keith Martin