Carol Wang (Joint Committee on Taxation), Check-the-Box Regulations After Pillar Two, 112 Tax Notes Int'l 1501 (Dec. 11, 2023):

Since December 1996, domestic and foreign “eligible entities” have been able to elect their tax classification for U.S. federal income purposes. As a result, eligible entities may elect to be a corporation subject to entity-level tax, a partnership that is not subject to entity-level tax but rather flows through the tax to its owners, or an entity disregarded as separate from its owner (“DRE”). DRE’s that are owned by individuals are treated as sole proprietorships and DRE’s that are owned by corporations or partnerships are treated as a branch or division of that corporation or partnership. They are ignored for U.S. tax purposes and deemed to be the same taxable entity as their regarded owner.

This paper focuses on foreign DRE’s (referred to more colloquially as branches), and how their use in tax planning, traditionally to mitigate subpart F, have been affected by the passage of GILTI and CAMT, as well as how they would be affected under Pillar Two.

Using a few simplified examples, this paper shows that it continues to be important to include foreign branches in MNE structures after GILTI and CAMT. Because GILTI is taxed at half the rates of subpart F income, and because GILTI applies only if subpart F does not apply to a category of income, taxpayers find it important to continue to qualify for an exception from subpart F. This has traditionally been managed with the use of foreign branches.

In addition, CAMT would potentially subject more foreign income to U.S. tax because it is based on financial accounting concepts, so there is no longer different tax treatment of foreign income that is “active” GILTI income (taxed at lower rates), versus “passive” subpart F income (taxed at higher rates). However, it continues to treat earnings differently if earned by a branch versus a corporation, in that the financial statement income of branches owned by CFCs would continue to be treated as aggregated with the CFC’s financial statement income. This consolidation of foreign branch income and loss, as well as foreign branch income subject to high foreign tax versus low foreign tax, can be helpful to minimize CAMT liability.

Pillar Two also uses financial accounting concepts and thus eliminates the distinction between passive and active income, but it goes further than CAMT by also removing the distinction between the earnings generated by a corporation versus a branch. Regardless of its U.S. tax classification, as a constituent entity, foreign earnings would be required to be taxed as 15%.