Pretzel Inc., a German corporation, conducts operations in the United States through a branch. The branch employs

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Question:

Pretzel Inc., a German corporation, conducts operations in the United States through a branch. The branch employs a number of people and maintains an office in New York City and a warehouse in New Jersey. During the current year, the U.S. branch’s financial statements report the following items of income and related expenses:

	Income	Expenses
Interest income on CD deposits with U.S. banks	$10,000	$0
Dividends from U.S. corporations	$25,000	$5,000
Income from sales of merchandise	$3,000,000	$1,600,000
Rental income on excess warehouse space	$10,000	$8,000

The $3,000,000 of sales revenue represents inventory that was purchased from an unrelated third party made up of $2,500,000 from sales to U.S. customers and $500,000 of sales to customers in Canada (title passage occurred in Canada) through the U.S. office, and that the warehouse ships. Assume that the U.S. branch has no liabilities, and that effectively connected taxable income and effectively connected E&P are the same. The branch had U.S. net ECI equity of $5,000,000 at the beginning of the year and U.S. net ECI equity of $5,500,000 at the end of the year. Further assume that FDAP type income is not of a type that it would automatically be included in ECI.

a. Assuming that no tax treaty applies, determine the total amount of U.S. tax that ForCo will pay as a result of the operations of its U.S. branch. Show all work.

b. Briefly discuss how the existing tax treaty between the United States and Germany might impact your answer in part a.

c. Briefly discuss how your answers to a. and b. might change if the U.S. operations were conducted through a U.S. subsidiary as opposed to conduting these operations through a branch.

d. Briefly discuss SALT issues associated with Pretzel, Inc.'s U.S. operations.