Super-Royalties

A United States tax term, which refers to imputed royalties that the Internal Revenue Service (IRS) taxes companies on, under so called transfer-pricing provisions, when it believes that actual parent-subsidiary royalty payments are too low. This situation arises when a U.S. parent company establishes a subsidiary in a country that has a much lower corporate tax rate than the United States. Tax is only payable by the U.S. parent on repatriated profits (usually with a credit for foreign taxes paid) and the U.S. parent can defer paying the U.S. tax by holding the profits offshore, and using them, for example, to invest in other offshore businesses. However, tax is immediately payable on royalty payments to the U.S. parent, often without a deduction for foreign taxes; thus companies in such a situation may have an incentive to keep intra-group royalty rates artificially low. The IRS will, when it suspects such an arrangement, seek to impute a royalty rate or “super royalty,” which it will then use as a basis for immediate taxation.

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