Two LLCs in a US consolidated group beneath Canco made tax compensation payments indirectly to the top CFA in that group in respect of the share of the U.S. taxable income of the US consolidated group earned through those LLCs during their 2011 and 2012 taxation years.
After finding that those payments by the LLCs (which were disregarded for US tax purposes) qualified under Reg. 5907(1.3)(a) as amounts that could reasonably be regarded as being in respect of income tax that would otherwise have been payable by the CFA single members of those LLCs in respect of the FAPI earned by those CFAs had their US tax liabilities been determined for US purposes on an unconsolidated basis, the Directorate indicated that:
Subsections 5907(1.1) to (1.13) of the Regulations provide rules for the computation of surplus balances in situations in which foreign affiliates are members of a group filing a consolidated income tax return in their jurisdiction of residence in circumstances such that one member of the group pays income tax or receives a refund on behalf of the group as a whole. These are supplemented by subsections 5907(1.091) and (1.092) where one or more of the members are the shareholders of fiscally transparent entities. Although there are no specific provisions governing the interaction of these sets of regulations, it is our view that the consolidated return provisions should generally be applied first and the fiscally transparent entity provisions applied afterward.