151. Since legal requirements and tax procedures in different countries are so highly varied, no single form of tax return could be suitable for all. The logical procedure would be to require each branch to fill out a regular tax return on the basis of its own accounts just as an independent concern would do, and to furnish such supplementary schedules as are requested to support and explain certain amounts, which are not the result of bona fide transactions at arm’s length. While taxpayers may well be required to submit some supplementary information supporting each branch tax return, the routine requirement of non-essential schedules should be avoided in the interest of simplicity and economy. Schedules at best are less satisfactory than a direct examination of branch accounts and records, and they should therefore be required only when a direct examination is impossible or when the desired information is not available at the branch.

152. Except for intra-company transactions and relationships, the accounts of a branch are on exactly the same basis as the accounts of an independent concern. The first step, therefore, in testing the reasonableness of the separate accounts of a branch should be to obtain a summary of intra-company transactions. This information would be provided by a schedule reconciling the balance of the current account between the branch and the home office at the beginning of the fiscal year with the balance at the end. If more than one current account is used, the balance of all must be reconciled. The required schedule might appear in a form somewhat as follows:


Analysis of the Intra-company Transactions of Branch … with the Home Office and/or Other Branches of the … Company during the Fiscal Year ending …

A. Home office current account: 
Balance at end of fiscal year  xxx 
Balance at beginning of fiscal year  xxx 
Increase (or decrease)  xx 
(For the purpose of this schedule, all intra-company transactions between this branch and any other branch or branches of the company are assumed to be cleared through the home office current account. If separate accounts for different branches are kept, they must be combined and explained by a supplementary schedule.) 
Intra-company charges from other branches: 
B. To branch balance-sheet accounts: 
(1) Cash remittances to branch  xx 
(2) Branch liabilities paid by home office  xx 
(3) Fixed assets provided or paid for by home office. …  xx 
(4) Branch net profit for period  xx 
(5) Other charges  xx 
C. To branch profit-and-loss accounts: 
(1) Merchandise received from home office or other branch  xx 
(2) Supplies received from home office or other branch  xx 
(3) Direct services rendered by home office or other branch  xx 
(4) Branch expenses paid by home office  xx 
(5) Apportioned charges  xx 
(6) Interest on advances from other branches  xx 
(7) Other charges  xx 
Total charges from other branches  xxx 
Intra-company credits (charges to other branches): 
D. To branch balance-sheet accounts: 
(1) Remittances to home office or other branches  xx 
(2) Home office liabilities paid by branch  xx 
(3) Branch net loss for period  xx 
(4) Fixed assets transferred to other branches  xx 
(5) Other credits  xx 
E. To branch profit-and-loss accounts: 
(1) Merchandise shipped to home office or other branch  xx 
(2) Commissions earned  xx 
(3) Supplies furnished (or returned)  xx 
(4) Direct services rendered to home office or other branch  xx 
(5) Interest on advances to other branches  xx 
(6) Other credits  xx 
Total charges to other branches  xxx 
Excess of charges from other branches (must equal increase in home office current)  xx 
Or excess of charges to other branches (must equal decrease in home office current) 
F. Were there any transactions between this branch and any company which has been affiliated with or subsidiary to the during all or part of the fiscal year covered by this return other than the transactions summarised in parts B, C, D, and E of this schedule?  
(If the answer is yes, Schedule I-F must be prepared in a form similar to Schedule I to explain all such transactions.) 

153. The intra-company transactions which involve charges or credits to branch balance sheet accounts ordinarily cause little difficulty. Cash remittances to or from the branch, items B(1) and D(1) of Schedule I, are perfectly definite transactions into which the question of valuation does not enter except in a minor way with respect to the conversion from one currency to another. The payment of direct branch liabilities by the home office and the payment of home office liabilities by the branch, items B(2) and D(2), are practically equivalent to cash remittances. The entries for the net profit or loss of the branch, items B(4) and D(3), will, of course, be supported by the branch profit-and-loss statement which will constitute the body of the return. Any difference between the profit shown by the books and the taxable income should be explained.

154. If charges to fixed asset accounts resulting from intra-company transactions, item B(3), are relatively large, they should be analysed with some care, because they will form the basis for future depreciation charges and will therefore enter into the determination of taxable income. A supplementary schedule could on occasion be required as a means of obtaining a detailed analysis of intra-company charges to fixed assets.

155. Since intra-company charges and credits to branch profit-and-loss accounts have an immediate effect on taxable income, complete information regarding such items should be available at the branch. The most important of these usually are the charges for goods received from the home office or other branch. If independently determined prices are available, a statement to the effect that current market prices are used in billing all inter-branch shipments should be sufficient, provided facilities are available by which the tax authorities may compare prices recorded on the books with quoted market prices. Tax authorities would, of course, be justified in asking for any information which would aid in making this comparison. If an independent factory price is used instead of quoted market prices, evidence should be available to show that the independent factory price actually is paid by dealers, and that these dealers handle enough of the product to make the price a representative one, or that such price is otherwise reasonably established.

156. In Chapter VII a method was presented by which joint profits on goods manufactured in one country and sold in another could be apportioned. Such an apportionment requires a careful analysis of production and distribution costs incurred in both countries and is therefore rather complicated. An enterprise which allocates profit on this basis, however, might present schedules showing:

157. Schedules of this kind, it should be noted, cannot be required from all taxpayers. The necessary information would be regularly available only in companies which have the most complete cost systems, and even then some of the results might be open to question. On occasion the method may, however, be profitably used in testing the reasonableness of an inter-branch billing price or an allocation of profit which is in dispute. This method of apportionment is by no means offered as an ideal or ultimate test, but it is a reasonable one and may serve where more convenient criteria are not available.

158. It must be recognised, however, that, no matter what schedules may be required, tax officials cannot hope to make a direct verification of foreign items of income and expense. Since direct verification is not feasible, it would seem that the possibility of independent verification by public accountants ought to be considered. While the profession of accounting is not highly developed in certain countries, in others it has achieved the status of a true profession with a strict code of ethics. Although it would not be feasible to require the certification of all returns, there would seem to be no reason why concerns whose books are regularly audited should not submit a certificate from the auditors in support of their tax returns. Such a certificate from a reputable firm of accountants, though not a guarantee, could be accepted as a good indication that the intra-company accounts were not unduly biased or distorted. If auditors’ certificates are to be used effectively for this purpose, however, a plan should be worked out by tax authorities and practising accountants in co-operation. It is essential that the responsibility of the accountant to his client and to the tax authorities should be clearly understood by all parties.