Guidance Regarding Foreign Base Company Sales Income, 78545-78553 [2011-32394]
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Federal Register / Vol. 76, No. 243 / Monday, December 19, 2011 / Rules and Regulations
provisions of § 1.368–1T as contained in
26 CFR, Part 1, §§ 1.301–1.400, revised
as of April 1, 2009, unless all such
taxpayers elect to apply such
provisions. This election requirement
will be satisfied if none of the specified
parties adopts inconsistent treatment.
For transactions entered into on or
before March 19, 2010, see § 1.368–1T
as contained in 26 CFR, Part 1,
§§ 1.301–1.400, revised as of April 1,
2009.
§ 1.368–1T
■
[Removed]
Par. 3. Section 1.368–1T is removed.
Steven T. Miller,
Deputy Commissioner for Services and
Enforcement.
Approved: December 6, 2011.
Emily S. McMahon,
Acting Assistant Secretary of the Treasury
(Tax Policy).
[FR Doc. 2011–32078 Filed 12–16–11; 8:45 am]
BILLING CODE 4830–01–P
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9563]
RIN 1545–BI45
Guidance Regarding Foreign Base
Company Sales Income
Internal Revenue Service (IRS),
Treasury.
ACTION: Final regulations and removal of
temporary regulations.
AGENCY:
This document contains final
regulations that provide guidance
relating to foreign base company sales
income when personal property sold by
a controlled foreign corporation (CFC) is
purchased, sold, manufactured,
produced, constructed, grown or
extracted by one or more branches of the
CFC. The regulations finalize proposed
regulations and withdraw temporary
regulations published on December 29,
2008. These regulations, in general,
affect controlled foreign corporations
and their United States shareholders.
DATES: Effective Date: These regulations
are effective on December 19, 2011.
Applicability Date: These regulations
apply to taxable years of CFCs beginning
after June 30, 2009, and for taxable years
of United States shareholders in which
or with which such taxable years of the
CFCs end.
FOR FURTHER INFORMATION CONTACT:
Barbara E. Rasch, (202) 622–3840 (not a
toll-free number).
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SUMMARY:
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SUPPLEMENTARY INFORMATION:
Background
On February 28, 2008, the IRS and the
Treasury Department published a notice
of proposed rulemaking in the Federal
Register (REG–124590–07, 2008–16 IRB
801, 73 FR 10716, as corrected at 73 FR
20201), which proposed amendments to
§ 1.954–3, including rules that
addressed the application of the section
954(d)(2) branch rules under the foreign
base company sales income (FBCSI)
rules. Written comments were received
in response to the notice of proposed
rulemaking, and a public hearing on the
proposed regulations was held on July
29, 2008. On December 29, 2008, the
IRS and the Treasury Department
published final and temporary
regulations under section 954(d) (TD
9438, 73 FR 79334–01, as corrected at
74 FR 11843–01) in the Federal
Register. On the same date, the IRS and
the Treasury Department published a
notice of proposed rulemaking (REG–
150066–08, 2009–5 IRB 423, 73 FR
79421–01) in the Federal Register crossreferencing the temporary regulations.
The temporary and proposed
regulations address the treatment under
the FBCSI rules of the sale by a CFC of
personal property that is purchased,
sold, manufactured, produced,
constructed, grown or extracted by one
or more branches of the CFC. Written
comments were received, and are
available at www.regulations.gov or
upon request. A public hearing was not
requested and none was held. This
Treasury decision adopts the proposed
regulation with the changes described
below as a final regulation and removes
the corresponding temporary
regulations.
Explanation of Provisions
These regulations amend the
provisions of § 1.954–3(b) that address
the application of the FBCSI rules to
CFCs with branches or similar
establishments (branches), and, in
particular manufacturing branches.
A. Branch Rule
Section 954(d)(1) defines FBCSI to
mean income derived by a CFC in
connection with: (i) The purchase of
personal property from a related person
and its sale to any person; (ii) the sale
of personal property to any person on
behalf of a related person; (iii) the
purchase of personal property from any
person and its sale to a related person;
or (iv) the purchase of personal property
from any person on behalf of a related
person, provided (in all of these cases)
that the property is manufactured,
produced, grown or extracted outside of
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the CFC’s country of organization and is
sold for use, consumption or disposition
outside of such country. There are
certain exceptions to the FBCSI rules,
including an exception that applies if a
CFC sells personal property that it
manufactured, produced, constructed,
grew or extracted. See section
954(d)(1)(A), § 1.954–3(a)(4).
Section 954(d)(2) applies the FBCSI
rules to a CFC that has a branch outside
the CFC’s country of incorporation
(branch rule). The branch rule applies if
the CFC carries on purchasing, selling,
manufacturing, producing, constructing,
growing or extracting activities by or
through the branch, and the carrying on
of such activities has substantially the
same tax effect as if the branch were a
wholly-owned subsidiary of the CFC, as
provided in regulations. If so, the
branch and the remainder of the CFC
will be treated as separate corporations
for purposes of determining FBCSI of
such CFC.
The ‘‘substantially same tax effect’’
determination is made pursuant to a tax
rate disparity test set forth in § 1.954–
3(b)(1)(i)(b) and § 1.954–3(b)(1)(ii)(b).
With respect to a sales or purchase
branch, the tax rate disparity test is
applied by comparing the rate of tax
imposed on the income derived from
the purchasing or selling activities of
the branch with the rate of tax that
would apply if the income were earned
by the remainder of the CFC. With
respect to a manufacturing branch, the
tax rate disparity test is applied by
comparing the rate of tax imposed on
the income derived from the purchasing
and selling activities of the CFC with
the rate of tax that would apply to such
income under the laws of the country in
which the manufacturing branch is
located.
These final regulations provide
guidance on the application of the
branch rule, in particular with respect to
a CFC that has multiple branches. For
example, the regulations set forth rules
on how to determine whether a CFC
earns FBCSI if purchase and sales
activities are conducted by multiple
branches and if multiple branches are
involved in the manufacture of either a
single or multiple items of personal
property that is sold by the CFC.
B. Summary of Comments
1. Demonstrably Greater Contribution
Section 1.954–3T(b)(1)(ii)(c)(3)(iii)
provides that if none of the branches or
the remainder of a CFC independently
satisfies the substantial contribution
test, but the CFC as a whole made a
substantial contribution, then for
purposes of applying the tax rate
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Federal Register / Vol. 76, No. 243 / Monday, December 19, 2011 / Rules and Regulations
disparity test, the location of
manufacture, production or
construction is the ‘‘tested
manufacturing location’’ unless the
‘‘tested sales location’’ provided a
‘‘demonstrably greater’’ contribution.
Comments were received seeking
clarification on the meaning of the word
‘‘demonstrably’’ and expressing concern
that it could be interpreted to provide
an evidentiary rule regarding the
standard of proof required with respect
to the determination of the location of
manufacture of an item pursuant to
§ 1.954–3T(b)(1)(ii)(c)(3)(iii). The IRS
and the Treasury Department did not
intend the word ‘‘demonstrably’’ to refer
to an elevated standard of proof. In
order to eliminate uncertainty, the word
‘‘demonstrably’’ has been deleted from
§ 1.954–3(b)(1)(ii)(c)(3)(iii).
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2. Grouping of Branches
Comments sought clarification of the
rule in § 1.954–3T(b)(2)(ii)(a) that
generally provides for the grouping of
branches that do not have tax rate
disparity with a purchasing or selling
branch, or with the remainder of the
CFC treated as purchasing or selling on
behalf of a manufacturing branch. This
grouping rule applies for purposes of
§ 1.954–3T(b)(2)(ii), which sets forth the
rules that apply after it has been
determined that a branch and the
remainder of a CFC will be treated as
separate corporations. Comments
suggested that this grouping rule could
be interpreted to group not only the
activities of the branches but also the
income of those branches and
recommended that the rule be clarified
by specifically stating that the rule
groups the ‘‘activities’’ of the relevant
branches.
The rules in § 1.954–3T(b)(2)(ii) apply
to determine whether the income of a
branch or remainder of a CFC is FBCSI
rather than to determine the amount of
the income of the branch or remainder
of the CFC. The purpose of this
grouping rule is to allow a CFC to
aggregate the activities of branches that
do not have tax rate disparity with a
sales or purchasing branch (or
remainder) when applying the separate
corporation analysis to determine
whether the sales income of the sales or
purchase branch (or remainder) is
FBCSI. § 1.954–3(b)(1)(ii)(c)(3)(v),
Example 1. The IRS and the Treasury
Department believe that the grouping
rule in § 1.954–3T(b)(2)(ii)(a) properly
aggregates the activities of the relevant
branches (or remainder). However, for
clarity, the phrase ‘‘the activities of’’
was added to § 1.954–3(b)(2)(ii)(a).
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C. Deletion of § 1.954–3(b)(2)(ii)(d)
The final regulations delete paragraph
(d) of § 1.954–3(b)(2)(ii), which
provided that income that is FBCSI as
a result of the application of § 1.954–
3(b)(1)(i) (purchasing or selling branch
rules) is not again classified as FBCSI as
a result of the application of § 1.954–
3(b)(1)(ii) (manufacturing branch rules).
This paragraph is no longer needed as
a result of the addition of the rule in
§ 1.954–3(b)(1)(ii)(c)(1), which provides
that if one or more sales or purchasing
branches are used in addition to a
manufacturing branch, then only the
manufacturing branch rules apply.
D. Future Guidance
The IRS and the Treasury Department
continue to study additional FBCSI
issues, and are considering whether to
issue additional guidance, including
guidance regarding when a branch
should be treated as a separate
corporation under section 954(d)(2), and
the scope of, and relationship between,
FBCSI and foreign base company
services income. The IRS and the
Treasury Department welcome
comments on these issues.
Special Analyses
It has been determined that this
Treasury decision is not a significant
regulatory action as defined in
Executive Order 12866; therefore, a
regulatory assessment is not required. It
also has been determined that section
553(b) of the Administrative Procedure
Act (5 U.S.C. chapter 5) does not apply
to these regulations. In addition, the
Regulatory Flexibility Act (5 U.S.C.
chapter 6) does not apply because the
regulations do not impose a collection
of information on small entities.
Pursuant to section 7805(f) of the Code,
the notice of proposed rulemaking that
preceded these final and temporary
regulations was submitted to the Chief
Counsel for Advocacy of the Small
Business Administration for comment
on its impact on small business.
Drafting Information
The principal author of these
regulations is Barbara E. Rasch of the
Office of Associate Chief Counsel
(International). However, other
personnel from the IRS and the Treasury
Department participated in their
development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.
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Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is
amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for 26 CFR part 1 continues to read in
part as follows:
■
Authority: 26 U.S.C. 7805 * * *.
Par. 2. Section 1.954–3 is amended
by:
■ 1. Revising paragraphs (b)(1)(i)(c),
(b)(1)(ii)(a), and (b)(1)(ii)(c).
■ 2. Revising paragraphs (b)(2)(i)(b),
(b)(2)(ii)(a), and (b)(2)(ii)(b).
■ 3. Removing and reserving paragraph
(b)(2)(ii)(d).
■ 4. Revising paragraph (b)(2)(ii)(e).
■ 5. Revising paragraph (b)(4)
introductory text.
■ 6. Revising Example 3 in paragraph
(b)(4).
■ 7. Adding Examples 8 and 9 in
paragraph (b)(4).
■ 8. Revising paragraphs (c) and (d).
The revisions and additions read as
follows:
■
§ 1.954–3
income.
Foreign base company sales
*
*
*
*
*
(b) * * *
(1) * * *
(i) * * *
(c) Use of more than one branch. If a
controlled foreign corporation carries on
purchasing or selling activities by or
through more than one branch or similar
establishment located outside the
country under the laws of which such
corporation is created or organized, then
paragraph (b)(1)(i)(b) of this section
shall be applied separately to the
income derived by each such branch or
similar establishment (by treating such
purchasing or selling branch or similar
establishment as if it were the only
branch or similar establishment of the
controlled foreign corporation and as if
any such other branches or similar
establishments were separate
corporations) in determining whether
the use of such branch or similar
establishment has substantially the
same tax effect as if such branch or
similar establishment were a wholly
owned subsidiary corporation of the
controlled foreign corporation. See
paragraph (b)(1)(ii)(c)(1) of this section
for rules applicable to a controlled
foreign corporation that carries on
purchase or sales activities by or
through one or more branches or similar
establishments in addition to carrying
on manufacturing activities by or
through one or more branches or similar
establishments.
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(ii) Manufacturing branch—(a) In
general. If a controlled foreign
corporation carries on manufacturing,
producing, constructing, growing, or
extracting activities by or through a
branch or similar establishment located
outside the country under the laws of
which such corporation is created or
organized and the use of the branch or
similar establishment for such activities
with respect to personal property
purchased or sold by or through the
remainder of the controlled foreign
corporation has substantially the same
tax effect as if the branch or similar
establishment were a wholly owned
subsidiary corporation of such
controlled foreign corporation, the
branch or similar establishment and the
remainder of the controlled foreign
corporation will be treated as separate
corporations for purposes of
determining the foreign base company
sales income of such corporation. See
section 954(d)(2). The provisions of this
paragraph (b)(1)(ii) will apply only if the
controlled foreign corporation
(including any branches or similar
establishments of such controlled
foreign corporation) manufactures,
produces, or constructs such personal
property within the meaning of
paragraph (a)(4)(i) of this section, or
carries on growing or extracting
activities with respect to such personal
property.
*
*
*
*
*
(c) Use of more than one branch—(1)
Use of one or more sales or purchase
branches in addition to a manufacturing
branch. If, with respect to personal
property manufactured, produced,
constructed, grown, or extracted by or
through a branch or similar
establishment located outside the
country under the laws of which the
controlled foreign corporation is created
or organized, purchasing or selling
activities are carried on by or through
more than one branch or similar
establishment, or by or through one or
more branches or similar establishments
located outside such country, of such
corporation, then paragraph (b)(1)(ii)(b)
of this section shall be applied
separately to the income derived by
each such purchasing or selling branch
or similar establishment (by treating
such purchasing or selling branch or
similar establishment as though it alone
were the remainder of the controlled
foreign corporation) for purposes of
determining whether the use of such
manufacturing, producing, constructing,
growing, or extracting branch or similar
establishment has substantially the
same tax effect as if such branch or
similar establishment were a wholly
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owned subsidiary corporation of the
controlled foreign corporation. If this
rule applies, the sales or purchase
branch rules contained in paragraph
(b)(1)(i) of this section do not apply. The
application of this paragraph
(b)(1)(ii)(c)(1) is illustrated by the
following example:
Example. All activities of controlled foreign
corporation conducted through sales
branches and manufacturing branch. (i)
Facts. FS, a controlled foreign corporation
organized under the laws of country M,
operates three branches. Branch A, located in
country A, manufactures Product X under the
principles of paragraph (a)(4)(i) of this
section. Branch B, located in Country B, sells
Product X manufactured by Branch A to
customers for use outside of Country B.
Branch C, located in Country C sells Product
X manufactured by Branch A to customers
for use outside of Country C. FS does not
conduct any manufacturing or selling
activities apart from the activities of
Branches A, B and C. Country M imposes an
effective rate of tax on sales income of 0%.
Country A imposes an effective rate of tax on
sales income of 20%. Country B imposes an
effective rate of tax on sales income of 20%.
Country C imposes an effective rate of tax on
sales income of 18%.
(ii) Result. Pursuant to this paragraph
(b)(1)(ii)(c)(1), paragraph (b)(1)(ii)(b) of this
section is applied to the sales income derived
by Branch B by treating Branch B as though
it alone were the remainder of the controlled
foreign corporation. The use of Branch B
does not have the same tax effect as if Branch
B were a wholly owned subsidiary of FS
because the tax rate applicable to the income
allocated to Branch B under paragraph
(b)(1)(ii)(b) of this section (20%) is not less
than 90% of, and at least 5 percentage points
less than, the effective rate of tax which
would apply to such income under the laws
of Country A (20%), the country in which
Branch A is located. In addition, paragraph
(b)(1)(ii)(b) of this section is applied
separately to the sales income derived by
Branch C by treating Branch C as though it
alone were the remainder of the controlled
foreign corporation. The use of Branch C
does not have the same tax effect as if Branch
C were a wholly owned subsidiary of FS
because the tax rate applicable to the income
allocated to Branch C under paragraph
(b)(1)(ii)(b) of this section (18%) is not less
than 90% of, and at least 5 percentage points
less than, the effective rate of tax which
would apply to such income under the laws
of Country A (20%), the country in which
Branch A is located. Pursuant to this
paragraph (b)(1)(ii)(c)(1), the rules under
paragraph (b)(1)(i) of this section for
determining whether a sales or purchase
branch is treated as a separate corporation
from the remainder of the controlled foreign
corporation do not apply.
(2) Use of more than one branch to
manufacture, produce, construct, grow,
or extract separate items of personal
property. If a controlled foreign
corporation carries on manufacturing,
producing, constructing, growing, or
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extracting activities with respect to
separate items of personal property by
or through more than one branch or
similar establishment located outside
the country under the laws of which
such corporation is created or
organized, then paragraphs (b)(1)(ii)(b)
and (c) of this section will be applied
separately to each such branch or
similar establishment (by treating such
manufacturing branch or similar
establishment as if it were the only such
branch or similar establishment of the
controlled foreign corporation and as if
any other such branches or similar
establishments were separate
corporations) for purposes of
determining whether the use of such
branch or similar establishment has
substantially the same tax effect as if
such branch or similar establishment
were a wholly owned subsidiary
corporation of the controlled foreign
corporation. The application of this
paragraph (b)(1)(ii)(c)(2) is illustrated by
the following example:
Example. Multiple branches that satisfy
paragraph (a)(4)(i). (i) Facts. FS is a
controlled foreign corporation organized in
Country M. FS operates two branches,
Branch A and Branch B located in Country
A and Country B, respectively. Branch A and
Branch B each manufacture separate items of
personal property (Product X and Product Y,
respectively) within the meaning of
paragraph (a)(4)(ii) or (iii) of this section.
Raw materials used in the manufacture of
Product X and Product Y are purchased by
FS from an unrelated person. FS engages in
activities in Country M to sell Product X and
Product Y to a related person for use,
disposition or consumption outside of
Country M. Employees of FS located in
Country M perform only sales functions. The
effective rate of tax imposed in Country M on
the income from the sales of Product X and
Product Y is 10%. Country A imposes an
effective rate of tax on sales income of 20%.
Country B imposes an effective rate of tax on
sales income of 12%.
(ii) Result. Pursuant to this paragraph
(b)(1)(ii)(c)(2), paragraph (b)(1)(ii)(b) of this
section is applied separately to Branch A and
Branch B with respect to the sales income of
FS attributable to Product X (manufactured
by Branch A) and Product Y (manufactured
by Branch B). Because the effective rate of tax
on FS’s sales income from the sale of Product
X in Country M (10%) is less than 90% of,
and at least 5 percentage points less than, the
effective rate of tax that would apply to such
income in the country in which Branch A is
located (20%), the use of Branch A to
manufacture Product X has substantially the
same tax effect as if Branch A were a wholly
owned subsidiary corporation of FS. Because
the effective rate of tax on FS’s sales income
from the sale of Product Y in Country M
(10%) is not less than 90% of, and at least
5 percentage points less than, the effective
rate of tax that would apply to such income
in the country in which Branch B is located
(12%), the use of Branch B to manufacture
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Product Y does not have substantially the
same tax effect as if Branch B were a wholly
owned subsidiary corporation of FS.
Consequently, only Branch A is treated as a
separate corporation apart from the
remainder of FS for purposes of determining
foreign base company sales income from the
sales of Product X.
(3) Use of more than one
manufacturing branch, or one or more
manufacturing branches and the
remainder of the controlled foreign
corporation, to manufacture, produce,
or construct the same item of personal
property—(i) In general. This paragraph
(b)(1)(ii)(c)(3) applies to determine the
location of manufacture, production, or
construction of personal property for
purposes of applying paragraph
(b)(1)(i)(b) or (b)(1)(ii)(b) of this section
where more than one branch or similar
establishment of a controlled foreign
corporation, or one or more branches or
similar establishments of a controlled
foreign corporation and the remainder
of the controlled foreign corporation,
each engage in manufacturing,
producing, or constructing activities
with respect to the same item of
personal property which is then sold by
the controlled foreign corporation. This
paragraph (b)(1)(ii)(c)(3) is applied
separately with respect to the income
derived by each purchasing or selling
branch or similar establishment or
purchasing or selling remainder of the
controlled foreign corporation as
provided under paragraphs (b)(1)(i) and
(b)(1)(ii) of this section. The location of
manufacture, production, or
construction is determined under
paragraph (b)(1)(ii)(c)(3)(ii) of this
section if one or more branches or
similar establishments or the remainder
of the controlled foreign corporation
independently satisfies paragraph
(a)(4)(i) of this section with respect to an
item of personal property. The location
of manufacture, production, or
construction is determined under
paragraph (b)(1)(ii)(c)(3)(iii) of this
section if none of the branches or
similar establishments or the remainder
of the controlled foreign corporation
independently satisfies paragraph
(a)(4)(i) of this section with respect to an
item of personal property, but the
controlled foreign corporation as a
whole makes a substantial contribution
to the manufacture, production or
construction of that property within the
meaning of paragraph (a)(4)(iv) of this
section. For purposes of this paragraph
(b)(1)(ii)(c)(3), the location of any
activity with respect to the manufacture,
production, or construction of an item
of personal property is determined
under paragraph (b)(1)(ii)(c)(3)(iv) of
this section. For purposes of this
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paragraph (b)(1)(ii)(c)(3), if multiple
branches or similar establishments are
located in a single jurisdiction, then the
activities of those branches will be
aggregated for purposes of determining
whether a branch or remainder of the
controlled foreign corporation satisfies
paragraph (a)(4)(i) of this section.
(ii) Manufacture, production, or
construction in one or more locations. If
only one branch or similar
establishment or only the remainder of
a controlled foreign corporation
independently satisfies paragraph
(a)(4)(i) of this section with respect to an
item of personal property, then that
branch or similar establishment or the
remainder of the controlled foreign
corporation will be the location of
manufacture, production, or
construction of that property for
purposes of applying paragraph
(b)(1)(i)(b) or (b)(1)(ii)(b) of this section
to the income from the sale of that
property. See paragraph (b)(1)(ii)(c)(3)(v)
Example 1 of this section. If more than
one branch or similar establishment or
one or more branches or similar
establishments and the remainder of the
controlled foreign corporation, each
independently satisfy paragraph (a)(4)(i)
of this section with respect to an item
of personal property, then the location
of manufacture, production, or
construction of that property for
purposes of applying paragraph
(b)(1)(i)(b) or (b)(1)(ii)(b) of this section
will be the location of that branch or
similar establishment or the jurisdiction
under the laws of which the remainder
of the controlled foreign corporation is
organized that satisfies paragraph
(a)(4)(i) of this section and that would,
after applying paragraph (b)(1)(ii)(b) of
this section to such branch or similar
establishment or paragraph (b)(1)(i)(b) of
this section to the remainder of the
controlled foreign corporation, impose
the lowest effective rate of tax on the
income allocated to such branch or the
remainder of the controlled foreign
corporation under such section (that is,
either paragraph (b)(1)(i)(b) or
(b)(1)(ii)(b) of this section). See
paragraph (b)(1)(ii)(c)(3)(v) Example 2 of
this section.
(iii) No location independently
satisfies manufacturing test. If no
branch or similar establishment or the
remainder of the controlled foreign
corporation independently satisfies
paragraph (a)(4)(i) of this section with
respect to an item of personal property
but the controlled foreign corporation as
a whole makes a substantial
contribution to the manufacture,
production, or construction of that
property within the meaning of
paragraph (a)(4)(iv) of this section, then
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for purposes of applying paragraph
(b)(1)(i)(b) or (b)(1)(ii)(b) of this section,
the location of manufacture, production,
or construction with respect to the
income derived by a purchasing or
selling branch or similar establishment
or the purchasing or selling remainder
of the controlled foreign corporation in
connection with the purchase or sale of
that property will be the ‘‘tested
manufacturing location’’ unless the
‘‘tested sales location’’ provides a
greater contribution to the manufacture,
production, or construction of the
property. The tested manufacturing
location is the location of any branch or
similar establishment or remainder of
the controlled foreign corporation that
contributes to the manufacture,
production, or construction of the
personal property, if any, that would,
after applying paragraph (b)(1)(ii)(b) of
this section to such branch or similar
establishment or paragraph (b)(1)(i)(b) of
this section to the remainder of the
controlled foreign corporation, be
treated as a separate corporation and
would impose the lowest effective rate
of tax on the income allocated to such
branch or similar establishment or to the
remainder of the controlled foreign
corporation under such section (that is,
either paragraph (b)(1)(i)(b) or
(b)(1)(ii)(b) of this section). The tested
sales location is the location of the
purchasing or selling branch or similar
establishment or the remainder of the
controlled foreign corporation by or
through which the purchasing or selling
activities are carried on with respect to
the personal property. For purposes of
this paragraph (b)(1)(ii)(c)(3)(iii), the
contribution to the manufacture,
production, or construction of the
personal property by the tested sales
location will be deemed to include the
activities of any branch or similar
establishment or remainder of the
controlled foreign corporation that
would not be treated as a corporation
separate from the tested sales location
after the application of paragraph
(b)(1)(i)(b) or (b)(1)(ii)(b) of this section.
For purposes of this paragraph
(b)(1)(ii)(c)(3)(iii), the contribution of the
tested manufacturing location to the
manufacture, production, or
construction of the personal property
will be deemed to include any activities
of any branch or similar establishment
or remainder of the controlled foreign
corporation that would be treated as a
corporation separate from the tested
sales location after the application of
paragraph (b)(1)(i)(b) or (b)(1)(ii)(b) of
this section. Whether the tested sales
location provides a greater contribution
to the manufacture, production, or
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construction of the personal property is
determined by weighing the relative
contributions to the manufacture,
production, or construction of that
property by the tested sales location and
the tested manufacturing location under
the facts and circumstances test
provided in paragraph (a)(4)(iv) of this
section. See paragraph (b)(1)(ii)(c)(3)(v)
Examples 3, 4, 5, and 6 of this section.
If the tested sales location provides a
greater contribution to the manufacture,
production, or construction of the
personal property than the tested
manufacturing location or if there is no
tested manufacturing location, then the
tested sales location is the location of
manufacture, production, or
construction of that property and the
rules of paragraphs (b)(1)(i)(a) and
(b)(1)(ii)(a) of this section will not apply
with respect to the income derived by
the tested sales location in connection
with the purchase or sale of that
property and the use of that purchasing
or selling branch or similar
establishment or the purchasing or
selling remainder will not result in a
branch being treated as a separate
corporation for purposes of paragraph
(b)(2)(ii) of this section.
(iv) Location of activity. For purposes
of paragraph (b)(1)(ii)(c)(3) of this
section, the location of any activity with
respect to the manufacture, production,
or construction of an item of personal
property is the location where the
employees of the controlled foreign
corporation perform such activity. For
example, the location of any activity
concerning intellectual property is
determined based on where employees
of the controlled foreign corporation
develop or direct the use or
development of the intellectual
property, not on the formal assignment
of that intellectual property.
(v) Examples. The following examples
illustrate the application of this
paragraph (b)(1)(ii)(c)(3):
Example 1. Multiple branches contribute to
the manufacture of a single product only one
branch satisfies paragraph (a)(4)(i). (i) Facts.
FS is a controlled foreign corporation
organized in Country M. FS operates three
branches, Branch A, Branch B, and Branch C,
located respectively in Country A, Country B,
and Country C. Branch A, Branch B, and
Branch C each performs different
manufacturing activities with respect to the
manufacture of Product X. Branch A, through
the activities of employees of FS located in
Country A, designs Product X. Branch B,
through the activities of employees of FS
located in Country B, provides quality
control and oversight and direction. Branch
C, through the activities of employees of FS
located in Country C, manufactures Product
X (within the meaning of paragraph (a)(4)(ii)
or (a)(4)(iii) of this section) using the designs
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developed by Branch A and under the
oversight of the quality control personnel of
Branch B. The activities of Branch A and
Branch B do not independently satisfy
paragraph (a)(4)(i) of this section. Employees
of FS located in Country M purchase the raw
materials used in the manufacture of Product
X from a related person and control the workin-process and finished goods throughout the
manufacturing process. Employees of FS
located in Country M also manage the
manufacturing costs and capacities related to
Product X. Further, employees of FS located
in Country M oversee the coordination
between the branches. The activities of the
remainder of FS in Country M do not
independently satisfy paragraph (a)(4)(i) of
this section. Employees of FS located in
Country M sell Product X to unrelated
persons for use outside of Country M. The
sales income from the sale of Product X is
taxed in Country M at an effective rate of tax
of 10%. Country C imposes an effective rate
of tax of 20% on sales income.
(ii) Result. Country C is the location of
manufacture for purposes of applying
paragraph (b)(1)(ii)(b) of this section because
only the activities of Branch C independently
satisfy paragraph (a)(4)(i) of this section. The
use of Branch C has substantially the same
tax effect as if Branch C were a wholly owned
subsidiary corporation of FS because the
effective rate of tax on the sales income
(10%) is less than 90% of, and at least 5
percentage points less than, the effective rate
of tax that would apply to such income in the
country in which Branch C is located (20%).
Therefore, sales of Product X by the
remainder of FS are treated as sales on behalf
of Branch C. In determining whether the
remainder of FS will qualify for the
manufacturing exception under paragraph
(a)(4)(iv) of this section, the activities of FS
will include the activities of Branch A or
Branch B, respectively, if each of those
branches would not be treated as a separate
corporation under paragraph (b)(1)(ii)(b) of
this section, if that paragraph were applied
independently to each of Branch A and
Branch B. See paragraph (b)(2)(ii)(a) of this
section.
Example 2. Multiple branches satisfy
paragraph (a)(4)(i) with respect to the same
product sold by the controlled foreign
corporation. (i) Facts. Assume the same facts
as in Example 1, except for the following. In
addition to the design of Product X, Branch
A also performs in Country A other
manufacturing activities, including those
ascribed to FS in Example 1, that are
sufficient to qualify as manufacturing under
paragraph (a)(4)(iv) of this section with
respect to Product X. Country A imposes an
effective rate of tax of 12% on sales income.
(ii) Result. Branch A and Branch C through
their activities each independently satisfy the
requirements of paragraph (a)(4)(i) of this
section. Therefore, paragraph (b)(1)(ii)(b) of
this section is applied by comparing the
effective rate of tax imposed on the income
from the sales of Product X against the lowest
effective rate of tax that would apply to the
sales income in either Country A or Country
C if paragraph (b)(1)(ii)(b) of this section were
applied separately to Branch A and Branch
C. Country A imposes the lower effective rate
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78549
of tax, and therefore, Branch A is treated as
the location of manufacture for purposes of
applying paragraph (b)(1)(ii)(b) of this
section. The effective rate of tax in Country
B is not considered because Branch B does
not satisfy paragraph (a)(4)(i) of this section.
Neither Branch A nor Branch C is treated as
a separate corporation because the effective
rate of tax on the sales income of FS from the
sale of Product X (10%) is not less than 90%
of, and at least 5 percentage points less than,
the effective rate of tax that would apply to
such income in the country in which Branch
A is located (12%). Sales of Product X by the
remainder of the controlled foreign
corporation are not treated as made on behalf
of any branch.
Example 3. Determining the location of
manufacture when manufacturing activities
performed by multiple branches and no
branch independently satisfies paragraph
(a)(4)(i). (i) Facts. FS, a controlled foreign
corporation organized in Country M,
purchases raw materials from a related
person. The raw materials are manufactured
(under the principles of paragraph (a)(4)(ii) or
(a)(4)(iii) of this section) into Product X by
CM, an unrelated corporation, pursuant to a
contract manufacturing arrangement. CM
physically performs the substantial
transformation, assembly, or conversion of
the raw materials in Country C. FS has two
branches, Branch A and Branch B, located in
Country A and Country B respectively.
Branch A, through the activities of employees
of FS located in Country A, designs Product
X. Branch B, through the activities of
employees of FS located in Country B,
controls manufacturing related logistics,
provides oversight and direction during the
manufacturing process, and controls the raw
materials and work-in-process. FS manages
the manufacturing costs and capacities
related to the manufacture of Product X
through employees located in Country M.
Further, employees of FS located in Country
M oversee the coordination between the
branches. Employees of FS located in
Country M also sell Product X to unrelated
persons for use outside of Country M.
Country M imposes an effective rate of tax on
sales income of 10%. Country A imposes an
effective rate of tax on sales income of 20%,
and Country B imposes an effective rate of
tax on sales income of 24%. Neither the
remainder of FS, nor any branch of FS
independently satisfies paragraph (a)(4)(i) of
this section. However, under the facts and
circumstances of the business, FS as a whole
provides a substantial contribution to the
manufacture of Product X within the
meaning of paragraph (a)(4)(iv) of this
section.
(ii) Result. Based on the facts, neither the
remainder of FS (through the activities of its
employees in Country M) nor any branch of
FS independently satisfies paragraph (a)(4)(i)
of this section with respect to Product X, but
FS, as a whole, provides a substantial
contribution through the activities of its
employees to the manufacture of Product X.
The remainder of FS, Branch A, and Branch
B each provides a contribution through the
activities of employees to the manufacture of
Product X. Therefore, FS must determine the
location of manufacture under paragraph
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(b)(1)(ii)(c)(3)(iii) of this section. The tested
sales location is Country M because the
selling activities with respect to Product X
are carried on by the remainder of FS. The
location of Branch A is the tested
manufacturing location because the effective
rate of tax imposed on FS’s sales income by
Country M (10%) is less than 90% of, and at
least 5 percentage points less than, the
effective rate of tax that would apply to such
income in Country A (20%), and Country A
has the lowest effective rate of tax among the
manufacturing branches that would, after
applying paragraph (b)(1)(ii)(b) of this
section, be treated as a separate corporation.
The activities of Branch B will be included
in the contribution of Branch A for purposes
of determining the location of manufacture of
Product X because the effective rate of tax
imposed on the sales income by Country M
(10%) is less than 90% of, and at least 5
percentage points less than, the effective rate
of tax that would apply to such income in
Country B (24%). Under the facts and
circumstances of the business, the activities
of the remainder of FS would not provide a
greater contribution to the manufacture of
Product X than the activities of Branch A and
Branch B, considered together. Therefore, the
location of manufacture is Country A, the
location of Branch A.
Example 4. Manufacturing activities
performed by multiple branches, no branch
independently satisfies paragraph (a)(4)(i),
selling activities carried on by remainder of
the controlled foreign corporation, remainder
contribution includes branch manufacturing
activities. (i) Facts. The facts are the same as
Example 3, except that the effective rate of
tax on sales income in Country B is 12%. In
addition, under the facts of the particular
business, the activities of employees of FS
located in Country B and Country M, if
considered together, would provide a greater
contribution to the manufacture of Product X
than the activities of employees of FS located
in Country A.
(ii) Result. Based on the facts, neither the
remainder of FS (through activities of its
employees in Country M) nor any branch of
FS independently satisfies paragraph (a)(4)(i)
of this section with respect to Product X, but
FS, as a whole, provides a substantial
contribution through the activities of its
employees to the manufacture of Product X.
The remainder of FS, Branch A, and Branch
B each provide a contribution through the
activities of their employees to the
manufacture of Product X. Therefore, FS
must determine the location of manufacture
under paragraph (b)(1)(ii)(c)(3)(iii) of this
section. The tested sales location is Country
M because the selling activities with respect
to Product X are carried on by the remainder
of FS. The location of Branch A is the tested
manufacturing location because the effective
rate of tax imposed on FS’s sales income by
Country M (10%) is less than 90% of, and at
least 5 percentage points less than, the
effective rate of tax that would apply to such
income in Country A (20%), and Branch A
is the only branch that would, after applying
paragraph (b)(1)(ii)(b) of this section, be
treated as a separate corporation. The
activities of Branch B will be included in the
contribution of the remainder of FS for
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purposes of determining the location of
manufacture of Product X because the
effective rate of tax imposed on the sales
income by Country M (10%) is not less than
90% of, and at least 5 percentage points less
than, the effective rate of tax that would
apply to such income in Country B (12%).
Under a facts and circumstances analysis,
considered together, the activities of Branch
B and the remainder of FS would provide a
greater contribution to the manufacture of
Product X than the activities of Branch A.
Therefore, the rules of paragraph (b)(1)(ii)(a)
of this section will not apply with respect to
the income derived by the remainder of FS
in connection with the sale of Product X, and
neither Branch A nor Branch B will be
treated as a separate corporation for purposes
of paragraph (b)(2)(ii) of this section.
Example 5. Manufacturing activities
performed by multiple branches, no branch
independently satisfies paragraph (a)(4)(i),
sales carried on by remainder of the
controlled foreign corporation and a sales
branch. (i) Facts. The facts are the same as
Example 3, except that sales of Product X are
also carried on through Branch D in Country
D, and Country D imposes a 16% effective
rate of tax on sales income. In addition,
under the facts and circumstances of the
business, the activities of employees of FS
located in Country A and Country M,
considered together, would provide a greater
contribution to the manufacture of Product X
than the activities of employees of FS located
in Country B.
(ii) Result. Based on the facts, neither the
remainder of FS nor any branch of FS
independently satisfies paragraph (a)(4)(i) of
this section with respect to Product X, but
FS, as a whole, provides a substantial
contribution through the activities of its
employees to the manufacture of Product X.
The remainder of FS, Branch A, and Branch
B each provide a contribution through the
activities of their employees to the
manufacture of Product X. Therefore, FS
must determine the location of manufacture
under paragraph (b)(1)(ii)(c)(3)(iii) of this
section. Further, pursuant to paragraph
(b)(1)(ii)(c)(1) of this section, paragraph
(b)(1)(ii)(c)(3)(iii) of this section must be
applied separately to the sales income
derived by the remainder of FS and Branch
D respectively. The results with respect to
the income derived by the remainder of FS
in connection with the sale of Product X in
this Example 5 are the same as in Example
3. However, paragraph (b)(1)(ii)(c)(3)(iii) of
this section must also be applied with respect
to Branch D because the sale of Product X is
also carried on through Branch D. Thus, for
purposes of that sales income, the location of
Branch D is the tested sales location. The
location of Branch B is the tested
manufacturing location because the effective
rate of tax imposed on Branch D’s sales
income by Country D (16%) is less than 90%
of, and at least 5 percentage points less than,
the effective rate of tax that would apply to
such income in Country B (24%), and Branch
B is the only branch that would, after
applying paragraph (b)(1)(ii)(b) of this
section, be treated as a separate corporation.
The manufacturing activities performed in
Country M by the remainder of FS and the
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manufacturing activities performed in
Country A by Branch A will be included in
Branch D’s contribution to the manufacture
of Product X for purposes of determining the
location of manufacture of Product X with
respect to Branch D’s sales income because
the effective rate of tax imposed on the sales
income by Country D (16%) is not less than
90% of, and at least 5 percentage points less
than, the effective rate of tax that would
apply to such income in Country M (10%)
and Country A (20%). Under the facts and
circumstances of the business, the activities
of Branch D, Branch A, and the remainder of
FS, considered together, would provide a
greater contribution to the manufacture of
Product X than the activities of Branch B.
Therefore, the rules of paragraph (b)(1)(ii)(a)
of this section will not apply with respect to
the income derived by Branch D in
connection with the sale of Product X and
the use of Branch D to sell Product X will not
result in a branch being treated as a separate
corporation for purposes of paragraph
(b)(2)(ii) of this section.
Example 6. Determining the location of
manufacture when employees of remainder
of controlled foreign corporation travel to
location of unrelated contract manufacturer
to perform manufacturing activities. (i) Facts.
FS, a controlled foreign corporation
organized in Country M, purchases raw
materials from a related person. The raw
materials are manufactured (under the
principles of paragraph (a)(4)(ii) or (a)(4)(iii)
of this section) into Product X by CM, an
unrelated corporation, pursuant to a contract
manufacturing arrangement. CM physically
performs the substantial transformation,
assembly, or conversion of the raw materials
in Country C. Employees of FS located in
Country M sell Product X to unrelated
persons for use outside of Country M.
Employees of FS located in Country M
engage in product design, manage the
manufacturing costs and capacities with
respect to Product X, and direct the use of
intellectual property for the purpose of
manufacturing Product X. Quality control
and oversight and direction of the
manufacturing process are conducted in
Country C by employees of FS who are
employed in Country M but who regularly
travel to Country C. Branch A, located in
Country A, is the only branch of FS. Product
design with respect to Product X conducted
by employees of FS located in Country A is
supplemental to the bulk of the design work,
which is done by employees of FS located in
Country M. At all times, employees of Branch
A control the raw materials, work-in-process
and finished goods. Employees of FS located
in Country A also control manufacturing
related logistics with respect to Product X.
Country M imposes an effective rate of tax on
sales income of 10%. Country A imposes an
effective rate of tax on sales income of 20%.
Neither the remainder of FS nor Branch A
independently satisfies paragraph (a)(4)(i) of
this section. However, under the facts and
circumstance of the business, FS as a whole
(including Branch A) provides a substantial
contribution to the manufacture of Product X
within the meaning of paragraph (a)(4)(iv) of
this section.
(ii) Result. Based on the facts, neither the
remainder of FS nor Branch A independently
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satisfies paragraph (a)(4)(i) of this section
with respect to Product X, but FS, as a whole,
provides a substantial contribution through
the activities of its employees to the
manufacture of Product X. The remainder of
FS and Branch A each provide a contribution
through the activities of employees to the
manufacture of Product X. Therefore, FS
must determine the location of manufacture
under paragraph (b)(1)(ii)(c)(3)(iii) of this
section. The tested sales location is Country
M because the selling activities with respect
to Product X are carried on by the remainder
of FS. The tested manufacturing location is
the location of Branch A because the effective
rate of tax imposed on the remainder of FS’s
sales income by Country M (10%) is less than
90% of, and at least 5 percentage points less
than, the effective rate of tax that would
apply to such income in Country A (20%),
and Branch A is the only branch that would,
after applying paragraph (b)(1)(ii)(b) of this
section, be treated as a separate corporation.
Although the activities of traveling
employees are considered in determining
whether FS, as a whole, makes a substantial
contribution to the manufacture of Product X
under paragraph (a)(4)(iv) of this section, the
activities of the employees of FS that are
performed in Country C are not taken into
consideration in determining whether
Country M, the jurisdiction under the laws of
which FS is organized, is the location of
manufacture under paragraph
(b)(1)(ii)(c)(3)(iii) of this section. Activities of
employees performed outside the jurisdiction
in which the controlled foreign corporation
is organized and outside a location in which
the controlled foreign corporation maintains
a branch or similar establishment, are not
considered in determining the location of
manufacture. Under the facts and
circumstances of the business, the activities
of employees of FS performed in Country M
do not provide a greater contribution to the
manufacture of Product X than the activities
of employees of FS performed in Country A.
Therefore, the location of manufacture is
Country A, the location of Branch A.
(4) Use of more than one branch to
manufacture, produce, construct, grow,
or extract separate items of personal
property. For purposes of paragraphs
(b)(1)(ii)(c)(2) and (b)(1)(ii)(c)(3) of this
section, an item of personal property
refers to an individual unit of personal
property rather than a type or class of
personal property.
(2) * * *
(i) * * *
(b) Activities treated as performed on
behalf of the remainder of corporation.
(1) With respect to purchasing or selling
activities performed by or through the
branch or similar establishment, such
purchasing or selling activities will,
with respect to personal property
manufactured, produced, constructed,
grown, or extracted by the remainder of
the controlled foreign corporation, be
treated as performed on behalf of the
remainder of the controlled foreign
corporation.
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(2) With respect to purchasing or
selling activities performed by or
through the branch or similar
establishment, such purchasing or
selling activities will, with respect to
personal property (other than property
described in paragraph (b)(2)(i)(b)(1) of
this section) purchased or sold, or
purchased and sold, by the remainder of
the controlled foreign corporation (or
any branch treated as the remainder of
the controlled foreign corporation), be
treated as performed on behalf of the
remainder of the controlled foreign
corporation.
*
*
*
*
*
(ii) * * *
(a) Treatment as separate
corporations. The branch or similar
establishment will be treated as a
wholly owned subsidiary corporation of
the controlled foreign corporation, and
such branch or similar establishment
will be deemed to be incorporated in the
country in which it is located. For
purposes of applying the rules of this
paragraph (b)(2)(ii), a branch or similar
establishment of a controlled foreign
corporation treated as a separate
corporation purchasing or selling on
behalf of the remainder of the controlled
foreign corporation under paragraph
(b)(2)(ii)(b) of this section, or the
remainder of the controlled foreign
corporation treated as a separate
corporation purchasing or selling on
behalf of a branch or similar
establishment of the controlled foreign
corporation under paragraph (b)(2)(ii)(c)
of this section, will include the
activities of any other branch or similar
establishment or remainder of the
controlled foreign corporation that
would not be treated as a separate
corporation (apart from the branch or
similar establishment of a controlled
foreign corporation that is treated as
performing purchasing or selling
activities on behalf of the remainder of
the controlled foreign corporation under
paragraph (b)(2)(ii)(b) of this section or
the remainder of the controlled foreign
corporation that is treated as performing
purchasing or selling activities on behalf
of the branch or similar establishment
under paragraph (b)(2)(ii)(c) of this
section) if the effective rate of tax
imposed on the income of the
purchasing or selling branch or similar
establishment, or purchasing or selling
remainder of the controlled foreign
corporation, were tested under the
principles of paragraph (b)(1)(i)(b) or
(b)(1)(ii)(b) of this section against the
effective rate of tax that would apply to
such income if it were considered
derived by such other branch or similar
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establishment or the remainder of the
controlled foreign corporation.
(b) Activities treated as performed on
behalf of the remainder of corporation.
(1) With respect to purchasing or selling
activities performed by or through the
branch or similar establishment, such
purchasing or selling activities will,
with respect to personal property
manufactured, produced, constructed,
grown, or extracted by the remainder of
the controlled foreign corporation, be
treated as performed on behalf of the
remainder of the controlled foreign
corporation.
(2) With respect to purchasing or
selling activities performed by or
through the branch or similar
establishment, such purchasing or
selling activities will, with respect to
personal property (other than property
described in paragraph (b)(2)(ii)(b)(1) of
this section) purchased or sold, or
purchased and sold, by the remainder of
the controlled foreign corporation (or
any branch treated as the remainder of
the controlled foreign corporation), be
treated as performed on behalf of the
remainder of the controlled foreign
corporation.
*
*
*
*
*
(d) [Reserved].
(e) Comparison with ordinary
treatment. Income derived by a branch
or similar establishment, or by the
remainder of the controlled foreign
corporation, will not be foreign base
company sales income under paragraph
(b) of this section if the income would
not be foreign base company sales
income if it were derived by a separate
controlled foreign corporation under
like circumstances.
*
*
*
*
*
(4) Illustrations. The application of
this paragraph (b) may be illustrated by
the following examples:
*
*
*
*
*
Example 3. (i) Facts. Corporation E, a
controlled foreign corporation incorporated
under the laws of foreign Country X, is a
wholly owned subsidiary of Corporation D,
also a controlled foreign corporation
incorporated under the laws of Country X.
Corporation E maintains Branch B in foreign
Country Y. Both corporations use the
calendar year as the taxable year. In 1964,
Corporation E’s sole activity, carried on
through Branch B, consists of the purchase of
articles manufactured in Country X by
Corporation D, a related person, and the sale
of the articles through Branch B to unrelated
persons. One hundred percent of the articles
sold through Branch B are sold for use
outside Country X and 90% are also sold for
use outside of Country Y. The income of
Corporation E derived by Branch B from such
transactions is taxed to Corporation E by
Country X only at the time Corporation E
distributes such income to Corporation D and
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is taxed on the basis of what the tax (a 40%
effective rate) would have been if the income
had been derived in 1964 by Corporation E
from sources within Country X from doing
business through a permanent establishment
therein. Country Y levies an income tax at an
effective rate of 50% on income derived from
sources within such country, but the income
of Branch B for 1964 is effectively taxed by
Country Y at a 5% rate since under the laws
of such country, only 10% of Branch B’s
income is derived from sources within such
country. Corporation E makes no
distributions to Corporation D in 1964.
(ii) Result. In determining foreign base
company sales income of Corporation E for
1964, Branch B is treated as a separate
wholly owned subsidiary corporation of
Corporation E, the 5% rate of tax being less
than 90% of, and at least 5 percentage points
less than the 40% rate. Income derived by
Branch B, treated as a separate corporation,
from the purchase from a related person
(Corporation D), of personal property
manufactured outside of Country Y and sold
for use, disposition, or consumption outside
of Country Y constitutes foreign base
company sales income. If, instead,
Corporation D were unrelated to Corporation
E, none of the income would be foreign base
company sales income because Corporation E
would be purchasing from and selling to
unrelated persons and if Branch B were
treated as a separate corporation it would
likewise be purchasing from and selling to
unrelated persons. Alternatively, if
Corporation D were related to Corporation E,
but Branch B manufactured the articles prior
to sale under the principles of paragraph
(a)(4)(iv) of this section, the income would
not be foreign base company sales income
because Branch B, treated as a separate
corporation, would qualify for the
manufacturing exception under paragraph
(a)(4) of this section.
srobinson on DSK4SPTVN1PROD with RULES
*
*
*
*
*
Example 8. Uniformly applicable incentive
tax rate in one country. (i) Facts. FS is a
controlled foreign corporation organized in
Country M. FS operates one branch, Branch
A, located in Country A. Branch A
manufactures Product X within the meaning
of paragraph (a)(4)(ii) or (a)(4)(iii) of this
section. Raw materials used in the
manufacture of Product X are purchased by
FS from an unrelated person. FS engages in
activities in Country M to sell Product X to
a related person for use outside of Country
M. Employees of FS located in Country M
carry on only sales functions. The effective
rate imposed in Country M on the income
from the sale of Product X is 10%. Country
A generally imposes an effective rate of tax
on income of 20%, but imposes a uniformly
applicable incentive rate of tax of 10% on
manufacturing income and related sales
income.
(ii) Result. The use of Branch A to
manufacture Product X does not have
substantially the same tax effect as if Branch
A were a wholly owned subsidiary
corporation of FS because the effective rate
of tax on FS’s sales income from the sale of
Product X in Country M (10%) is not less
than 90% of, and at least 5 percentage points
less than, the effective rate of tax that would
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18:16 Dec 16, 2011
Jkt 226001
apply to such income in the country in
which Branch A is located (10%).
Consequently, pursuant to paragraph
(b)(1)(ii)(b) of this section, Branch A is not
treated as a separate corporation apart from
the remainder of FS for purposes of
determining foreign base company sales
income.
Example 9. Manufacturing activities
performed by multiple branches, no branch
independently satisfies paragraph (a)(4)(i),
selling activities carried on by remainder of
the controlled foreign corporation, some
branch manufacturing activities included in
remainder contribution. (i) Facts. FS, a
controlled foreign corporation organized in
Country M, has three branches, Branch A,
Branch B, and Branch C, located in Country
A, Country B, and Country C respectively. FS
purchases raw materials from a related
person. The raw materials are manufactured
(under the principles of paragraph (a)(4)(ii) or
(a)(4)(iii) of this section) into Product X by
CM, an unrelated corporation, pursuant to a
contract manufacturing arrangement. CM
physically performs the substantial
transformation, assembly, or conversion
required to manufacture Product X outside of
FS’s country of organization. FS manages the
manufacturing costs and capacities with
respect to the manufacture of Product X
through employees located in Country M.
Further, employees of FS located in Country
M oversee the coordination between the
branches. Branch A, through the activities of
employees of FS located in Country A,
designs Product X, controls manufacturing
related logistics, and controls the raw
materials and work-in-process during the
manufacturing process. Branch B, through
the activities of employees of FS located in
Country B, provides quality control. Branch
C, through the activities of employees of FS
located in Country C, provides oversight and
direction during the manufacturing process.
Employees of FS located in Country M sell
Product X to unrelated persons for use
outside of Country M. Country M imposes an
effective rate of tax on sales income of 10%.
Country A imposes an effective rate of tax on
sales income of 12%, Country B imposes an
effective rate of tax on sales income of 24%,
and Country C imposes an effective rate of
tax on sales income of 25%. None of the
remainder of FS, Branch A, Branch B, or
Branch C independently satisfies paragraph
(a)(4)(i) of this section. However, under the
facts and circumstances of the business, FS,
as a whole, provides a substantial
contribution to the manufacture of Product X
within the meaning of paragraph (a)(4)(iv) of
this section. Under the facts and
circumstances of the business, the activities
of the remainder of FS and Branch A, if
considered together, would not provide a
greater contribution to the manufacture of
Product X than the activities of Branch B and
Branch C, if considered together. Under the
facts and circumstances of the business,
however, the activities of the employees of
the remainder of FS and Branch A, if
considered together, would constitute a
substantial contribution to the manufacture
of Product X.
(ii) Result. Based on the facts, neither the
remainder of FS (through activities of its
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Frm 00088
Fmt 4700
Sfmt 4700
employees in Country M) nor any branch of
FS independently satisfies paragraph (a)(4)(i)
of this section with respect to Product X, but
FS, as a whole, provides a substantial
contribution through the activities of its
employees to the manufacture of Product X.
The remainder of FS, Branch A, Branch B,
and Branch C each provide a contribution
through the activities of employees to the
manufacture of Product X. Therefore, FS
must determine the location of manufacture
under paragraph (b)(1)(ii)(c)(3)(iii) of this
section. The tested sales location is Country
M because the selling activities with respect
to Product X are carried on by the remainder
of FS. The location of Branch B is the tested
manufacturing location because the effective
rate of tax imposed on FS’s sales income by
Country M (10%) is less than 90% of, and at
least 5 percentage points less than, the
effective rate of tax that would apply to such
income in Country B (24%), and Country B
has the lowest effective rate of tax among the
manufacturing branches that would, after
applying paragraph (b)(1)(ii)(b) of this
section, be treated as a separate corporation.
The manufacturing activities performed in
Country A by Branch A will be included in
the contribution of the remainder of FS for
purposes of determining the location of
manufacture of Product X because the
effective rate of tax imposed on the sales
income by Country M (10%) is not less than
90% of, and at least 5 percentage points less
than, the effective rate of tax that would
apply to such income in Country A (12%).
The manufacturing activities performed in
Country C by Branch C will be included in
the contribution of Branch B for purposes of
determining the location of manufacture of
Product X because the effective rate of tax
imposed on the sales income by Country M
(10%) is less than 90% of, and at least 5
percentage points less than, the effective rate
of tax that would apply to such income in
Country C (25%). Under the facts and
circumstances of the business, the
manufacturing activities of the remainder of
FS and Branch A, considered together, would
not provide a greater contribution to the
manufacture of Product X than the activities
of Branch B and Branch C, considered
together. Therefore, the location of
manufacture is Country B, the location of
Branch B. In determining that Country B is
the location of manufacture, it was
determined that after applying paragraph
(b)(1)(ii)(b) of this section Branch B would be
treated as a separate corporation under
paragraph (b)(1)(ii)(a) of this section for
purposes of determining foreign base
company sales income. To determine
whether income from the sale of Product X
is foreign base company sales income, the
remainder of FS takes into account the
activities of Branch A because, under
paragraph (b)(2)(ii)(a) of this section, Branch
A would not be treated as a separate
corporation apart from FS. The remainder of
FS is considered to have manufactured
Product X under paragraph (a)(4)(i) of this
section because the manufacturing activities
of the remainder of FS and Branch A,
considered together, would make a
substantial contribution to the manufacture
of Product X within the meaning of
E:\FR\FM\19DER1.SGM
19DER1
Federal Register / Vol. 76, No. 243 / Monday, December 19, 2011 / Rules and Regulations
paragraph (a)(4)(iv) of this section. Therefore,
income derived from the sale of Product X by
the remainder of FS does not constitute
foreign base company sales income.
(c) Effective/applicability date.
Paragraphs (a)(1)(i), (a)(1)(iii) Example
1, (a)(1)(iii) Example 2, (a)(2), (a)(4)(i),
(a)(4)(ii), (a)(4)(iii), (a)(4)(iv), (a)(6)(i),
(b)(1)(i)(c), (b)(1)(ii)(a), (b)(1)(ii)(c),
(b)(2)(i)(b), (b)(2)(ii)(a), (b)(2)(ii)(b),
(b)(2)(ii)(e), and (b)(4) Example 3, (b)(4)
Example 8, and (b)(4) Example 9 of this
section shall apply to taxable years of
controlled foreign corporations
beginning after June 30, 2009, and for
taxable years of United States
shareholders in which or with which
such taxable years of the controlled
foreign corporations end.
(d) Application of regulations to
earlier taxable years. A taxpayer may
choose to apply these regulations
retroactively with respect to its open
taxable years that began prior to July 1,
2009. The taxpayer may so choose if and
only if the taxpayer and all members of
the taxpayer’s affiliated group (within
the meaning of section 1504(a)) apply
these regulations, in their entirety, to
the earliest taxable year of each
controlled foreign corporation that ends
with or within an open taxable year of
the taxpayer and to all subsequent
taxable years.
§ 1.954–3T
■
[Removed]
Par. 3. Section 1.954–3T is removed.
Approved: December 6, 2011.
Steven T. Miller,
Deputy Commissioner for Services and
Enforcement.
Emily S. McMahon,
Acting Assistant Secretary of the Treasury
(Tax Policy).
[FR Doc. 2011–32394 Filed 12–15–11; 11:15 am]
BILLING CODE 4830–01–P
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9567]
RIN 1545–BK17
Reporting of Specified Foreign
Financial Assets
Internal Revenue Service (IRS),
Treasury.
ACTION: Temporary regulations.
srobinson on DSK4SPTVN1PROD with RULES
AGENCY:
This document contains
temporary regulations relating to the
provisions of the Hiring Incentives to
Restore Employment (HIRE) Act that
require foreign financial assets to be
SUMMARY:
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18:16 Dec 16, 2011
Jkt 226001
reported to the Internal Revenue Service
for taxable years beginning after March
18, 2010. In particular, the temporary
regulations provide guidance relating to
the requirement that individuals attach
a statement to their income tax return to
provide required information regarding
foreign financial assets in which they
have an interest. The temporary
regulations affect individuals required
to file Form 1040, ‘‘U.S. Individual
Income Tax Return,’’ and certain
individuals required to file Form 1040–
NR, ‘‘Nonresident Alien Income Tax
Return.’’ The text of these temporary
regulations also serves as the text of
proposed regulations contained in a
cross-reference notice of proposed
rulemaking (REG–130302–10) published
in the Proposed Rules section in this
issue of the Federal Register.
DATES: Effective Date: These regulations
are effective on December 19, 2011.
Applicability Dates: For dates of
applicability, see §§ 1.6038D–1T(b),
1.6038D–2T(e), 1.6038D–3T(e),
1.6038D–4T(b), 1.6038D–5T(g),
1.6038D–7T(d), and 1.6038D–8T(g).
FOR FURTHER INFORMATION CONTACT:
Joseph S. Henderson, (202) 622–3880
(not a toll-free call).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
These temporary regulations are being
issued without prior notice and public
comment pursuant to the
Administrative Procedure Act (5 U.S.C.
553). For this reason, the collection of
information contained in these
regulations has been reviewed and
pending receipt and evaluation of
public comments, approved by the
Office of Management and Budget under
Control Number 1545–2195. Responses
to this collection of information are
mandatory.
An agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
unless the collection of information
displays a valid control number. The
collection of information contained in
these regulations is satisfied by filing
Form 8938, ‘‘Statement of Specified
Foreign Financial Assets,’’ OMB No.
1545–2195, with the respondent’s
income tax return.
For further information concerning
this collection of information, and
where to submit comments on the
collection of information and the
accuracy of the estimated burden, and
suggestions for reducing this burden,
please refer to the preamble to the crossreferencing notice of proposed
rulemaking published in the Proposed
PO 00000
Frm 00089
Fmt 4700
Sfmt 4700
78553
Rules section of this issue of the Federal
Register.
Books and records relating to a
collection of information must be
retained as long as their contents may
become material in the administration
of any internal revenue law. Generally,
tax returns and tax return information
are confidential, as required by 26
U.S.C. 6103.
Background
This document contains amendments
to the Income Tax Regulations (26 CFR
part 1) for reporting specified foreign
financial assets under section 6038D of
the Internal Revenue Code (Code).
Section 6038D was enacted by section
511 of the HIRE Act. Section 6038D(a)
requires an individual who holds any
interest in a specified foreign financial
asset during the taxable year to attach a
statement to that individual’s return of
tax imposed by subtitle A of the Code
to report the information identified in
section 6038D(c), if the aggregate value
of the specified foreign financial assets
in which the individual holds an
interest exceeds $50,000 for the taxable
year, or such higher dollar amount as
the Secretary may prescribe.
Section 6038D(b) defines specified
foreign financial assets. For purposes of
section 6038D, a specified foreign
financial asset is any financial account
maintained by a foreign financial
institution and, to the extent not held in
an account at a financial institution: (i)
Any stock or security issued by any
person other than a United States
person; (ii) any financial instrument or
contract held for investment that has an
issuer or counterparty that is not a
United States person; and (iii) any
interest in a foreign entity.
Section 6038D(c) sets forth the
information an individual must include
on the statement reporting specified
foreign financial assets. For a financial
account, the name and address of the
financial institution in which the
account is maintained must be reported,
as well as the account number. For any
stock or security, the name and address
of the non-U.S. issuer, as well as
information necessary to identify the
class or issue of which the stock or
security is a part, must be reported. In
the case of any other instrument,
contract, or interest, the names and
addresses of all issuers and
counterparties must be reported,
together with the information necessary
to identify the instrument, contract, or
interest. The maximum value of each
specified foreign financial asset during
the taxable year also must be reported.
An individual who fails to disclose
the information required to be reported
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Agencies
[Federal Register Volume 76, Number 243 (Monday, December 19, 2011)]
[Rules and Regulations]
[Pages 78545-78553]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-32394]
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9563]
RIN 1545-BI45
Guidance Regarding Foreign Base Company Sales Income
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations and removal of temporary regulations.
-----------------------------------------------------------------------
SUMMARY: This document contains final regulations that provide guidance
relating to foreign base company sales income when personal property
sold by a controlled foreign corporation (CFC) is purchased, sold,
manufactured, produced, constructed, grown or extracted by one or more
branches of the CFC. The regulations finalize proposed regulations and
withdraw temporary regulations published on December 29, 2008. These
regulations, in general, affect controlled foreign corporations and
their United States shareholders.
DATES: Effective Date: These regulations are effective on December 19,
2011.
Applicability Date: These regulations apply to taxable years of
CFCs beginning after June 30, 2009, and for taxable years of United
States shareholders in which or with which such taxable years of the
CFCs end.
FOR FURTHER INFORMATION CONTACT: Barbara E. Rasch, (202) 622-3840 (not
a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
On February 28, 2008, the IRS and the Treasury Department published
a notice of proposed rulemaking in the Federal Register (REG-124590-07,
2008-16 IRB 801, 73 FR 10716, as corrected at 73 FR 20201), which
proposed amendments to Sec. 1.954-3, including rules that addressed
the application of the section 954(d)(2) branch rules under the foreign
base company sales income (FBCSI) rules. Written comments were received
in response to the notice of proposed rulemaking, and a public hearing
on the proposed regulations was held on July 29, 2008. On December 29,
2008, the IRS and the Treasury Department published final and temporary
regulations under section 954(d) (TD 9438, 73 FR 79334-01, as corrected
at 74 FR 11843-01) in the Federal Register. On the same date, the IRS
and the Treasury Department published a notice of proposed rulemaking
(REG-150066-08, 2009-5 IRB 423, 73 FR 79421-01) in the Federal Register
cross-referencing the temporary regulations. The temporary and proposed
regulations address the treatment under the FBCSI rules of the sale by
a CFC of personal property that is purchased, sold, manufactured,
produced, constructed, grown or extracted by one or more branches of
the CFC. Written comments were received, and are available at
www.regulations.gov or upon request. A public hearing was not requested
and none was held. This Treasury decision adopts the proposed
regulation with the changes described below as a final regulation and
removes the corresponding temporary regulations.
Explanation of Provisions
These regulations amend the provisions of Sec. 1.954-3(b) that
address the application of the FBCSI rules to CFCs with branches or
similar establishments (branches), and, in particular manufacturing
branches.
A. Branch Rule
Section 954(d)(1) defines FBCSI to mean income derived by a CFC in
connection with: (i) The purchase of personal property from a related
person and its sale to any person; (ii) the sale of personal property
to any person on behalf of a related person; (iii) the purchase of
personal property from any person and its sale to a related person; or
(iv) the purchase of personal property from any person on behalf of a
related person, provided (in all of these cases) that the property is
manufactured, produced, grown or extracted outside of the CFC's country
of organization and is sold for use, consumption or disposition outside
of such country. There are certain exceptions to the FBCSI rules,
including an exception that applies if a CFC sells personal property
that it manufactured, produced, constructed, grew or extracted. See
section 954(d)(1)(A), Sec. 1.954-3(a)(4).
Section 954(d)(2) applies the FBCSI rules to a CFC that has a
branch outside the CFC's country of incorporation (branch rule). The
branch rule applies if the CFC carries on purchasing, selling,
manufacturing, producing, constructing, growing or extracting
activities by or through the branch, and the carrying on of such
activities has substantially the same tax effect as if the branch were
a wholly-owned subsidiary of the CFC, as provided in regulations. If
so, the branch and the remainder of the CFC will be treated as separate
corporations for purposes of determining FBCSI of such CFC.
The ``substantially same tax effect'' determination is made
pursuant to a tax rate disparity test set forth in Sec. 1.954-
3(b)(1)(i)(b) and Sec. 1.954-3(b)(1)(ii)(b). With respect to a sales
or purchase branch, the tax rate disparity test is applied by comparing
the rate of tax imposed on the income derived from the purchasing or
selling activities of the branch with the rate of tax that would apply
if the income were earned by the remainder of the CFC. With respect to
a manufacturing branch, the tax rate disparity test is applied by
comparing the rate of tax imposed on the income derived from the
purchasing and selling activities of the CFC with the rate of tax that
would apply to such income under the laws of the country in which the
manufacturing branch is located.
These final regulations provide guidance on the application of the
branch rule, in particular with respect to a CFC that has multiple
branches. For example, the regulations set forth rules on how to
determine whether a CFC earns FBCSI if purchase and sales activities
are conducted by multiple branches and if multiple branches are
involved in the manufacture of either a single or multiple items of
personal property that is sold by the CFC.
B. Summary of Comments
1. Demonstrably Greater Contribution
Section 1.954-3T(b)(1)(ii)(c)(3)(iii) provides that if none of the
branches or the remainder of a CFC independently satisfies the
substantial contribution test, but the CFC as a whole made a
substantial contribution, then for purposes of applying the tax rate
[[Page 78546]]
disparity test, the location of manufacture, production or construction
is the ``tested manufacturing location'' unless the ``tested sales
location'' provided a ``demonstrably greater'' contribution. Comments
were received seeking clarification on the meaning of the word
``demonstrably'' and expressing concern that it could be interpreted to
provide an evidentiary rule regarding the standard of proof required
with respect to the determination of the location of manufacture of an
item pursuant to Sec. 1.954-3T(b)(1)(ii)(c)(3)(iii). The IRS and the
Treasury Department did not intend the word ``demonstrably'' to refer
to an elevated standard of proof. In order to eliminate uncertainty,
the word ``demonstrably'' has been deleted from Sec. 1.954-
3(b)(1)(ii)(c)(3)(iii).
2. Grouping of Branches
Comments sought clarification of the rule in Sec. 1.954-
3T(b)(2)(ii)(a) that generally provides for the grouping of branches
that do not have tax rate disparity with a purchasing or selling
branch, or with the remainder of the CFC treated as purchasing or
selling on behalf of a manufacturing branch. This grouping rule applies
for purposes of Sec. 1.954-3T(b)(2)(ii), which sets forth the rules
that apply after it has been determined that a branch and the remainder
of a CFC will be treated as separate corporations. Comments suggested
that this grouping rule could be interpreted to group not only the
activities of the branches but also the income of those branches and
recommended that the rule be clarified by specifically stating that the
rule groups the ``activities'' of the relevant branches.
The rules in Sec. 1.954-3T(b)(2)(ii) apply to determine whether
the income of a branch or remainder of a CFC is FBCSI rather than to
determine the amount of the income of the branch or remainder of the
CFC. The purpose of this grouping rule is to allow a CFC to aggregate
the activities of branches that do not have tax rate disparity with a
sales or purchasing branch (or remainder) when applying the separate
corporation analysis to determine whether the sales income of the sales
or purchase branch (or remainder) is FBCSI. Sec. 1.954-
3(b)(1)(ii)(c)(3)(v), Example 1. The IRS and the Treasury Department
believe that the grouping rule in Sec. 1.954-3T(b)(2)(ii)(a) properly
aggregates the activities of the relevant branches (or remainder).
However, for clarity, the phrase ``the activities of'' was added to
Sec. 1.954-3(b)(2)(ii)(a).
C. Deletion of Sec. 1.954-3(b)(2)(ii)(d)
The final regulations delete paragraph (d) of Sec. 1.954-
3(b)(2)(ii), which provided that income that is FBCSI as a result of
the application of Sec. 1.954-3(b)(1)(i) (purchasing or selling branch
rules) is not again classified as FBCSI as a result of the application
of Sec. 1.954-3(b)(1)(ii) (manufacturing branch rules). This paragraph
is no longer needed as a result of the addition of the rule in Sec.
1.954-3(b)(1)(ii)(c)(1), which provides that if one or more sales or
purchasing branches are used in addition to a manufacturing branch,
then only the manufacturing branch rules apply.
D. Future Guidance
The IRS and the Treasury Department continue to study additional
FBCSI issues, and are considering whether to issue additional guidance,
including guidance regarding when a branch should be treated as a
separate corporation under section 954(d)(2), and the scope of, and
relationship between, FBCSI and foreign base company services income.
The IRS and the Treasury Department welcome comments on these issues.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 12866;
therefore, a regulatory assessment is not required. It also has been
determined that section 553(b) of the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these regulations. In addition, the
Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply because
the regulations do not impose a collection of information on small
entities. Pursuant to section 7805(f) of the Code, the notice of
proposed rulemaking that preceded these final and temporary regulations
was submitted to the Chief Counsel for Advocacy of the Small Business
Administration for comment on its impact on small business.
Drafting Information
The principal author of these regulations is Barbara E. Rasch of
the Office of Associate Chief Counsel (International). However, other
personnel from the IRS and the Treasury Department participated in
their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for 26 CFR part 1 continues to read
in part as follows:
Authority: 26 U.S.C. 7805 * * *.
0
Par. 2. Section 1.954-3 is amended by:
0
1. Revising paragraphs (b)(1)(i)(c), (b)(1)(ii)(a), and (b)(1)(ii)(c).
0
2. Revising paragraphs (b)(2)(i)(b), (b)(2)(ii)(a), and (b)(2)(ii)(b).
0
3. Removing and reserving paragraph (b)(2)(ii)(d).
0
4. Revising paragraph (b)(2)(ii)(e).
0
5. Revising paragraph (b)(4) introductory text.
0
6. Revising Example 3 in paragraph (b)(4).
0
7. Adding Examples 8 and 9 in paragraph (b)(4).
0
8. Revising paragraphs (c) and (d).
The revisions and additions read as follows:
Sec. 1.954-3 Foreign base company sales income.
* * * * *
(b) * * *
(1) * * *
(i) * * *
(c) Use of more than one branch. If a controlled foreign
corporation carries on purchasing or selling activities by or through
more than one branch or similar establishment located outside the
country under the laws of which such corporation is created or
organized, then paragraph (b)(1)(i)(b) of this section shall be applied
separately to the income derived by each such branch or similar
establishment (by treating such purchasing or selling branch or similar
establishment as if it were the only branch or similar establishment of
the controlled foreign corporation and as if any such other branches or
similar establishments were separate corporations) in determining
whether the use of such branch or similar establishment has
substantially the same tax effect as if such branch or similar
establishment were a wholly owned subsidiary corporation of the
controlled foreign corporation. See paragraph (b)(1)(ii)(c)(1) of this
section for rules applicable to a controlled foreign corporation that
carries on purchase or sales activities by or through one or more
branches or similar establishments in addition to carrying on
manufacturing activities by or through one or more branches or similar
establishments.
[[Page 78547]]
(ii) Manufacturing branch--(a) In general. If a controlled foreign
corporation carries on manufacturing, producing, constructing, growing,
or extracting activities by or through a branch or similar
establishment located outside the country under the laws of which such
corporation is created or organized and the use of the branch or
similar establishment for such activities with respect to personal
property purchased or sold by or through the remainder of the
controlled foreign corporation has substantially the same tax effect as
if the branch or similar establishment were a wholly owned subsidiary
corporation of such controlled foreign corporation, the branch or
similar establishment and the remainder of the controlled foreign
corporation will be treated as separate corporations for purposes of
determining the foreign base company sales income of such corporation.
See section 954(d)(2). The provisions of this paragraph (b)(1)(ii) will
apply only if the controlled foreign corporation (including any
branches or similar establishments of such controlled foreign
corporation) manufactures, produces, or constructs such personal
property within the meaning of paragraph (a)(4)(i) of this section, or
carries on growing or extracting activities with respect to such
personal property.
* * * * *
(c) Use of more than one branch--(1) Use of one or more sales or
purchase branches in addition to a manufacturing branch. If, with
respect to personal property manufactured, produced, constructed,
grown, or extracted by or through a branch or similar establishment
located outside the country under the laws of which the controlled
foreign corporation is created or organized, purchasing or selling
activities are carried on by or through more than one branch or similar
establishment, or by or through one or more branches or similar
establishments located outside such country, of such corporation, then
paragraph (b)(1)(ii)(b) of this section shall be applied separately to
the income derived by each such purchasing or selling branch or similar
establishment (by treating such purchasing or selling branch or similar
establishment as though it alone were the remainder of the controlled
foreign corporation) for purposes of determining whether the use of
such manufacturing, producing, constructing, growing, or extracting
branch or similar establishment has substantially the same tax effect
as if such branch or similar establishment were a wholly owned
subsidiary corporation of the controlled foreign corporation. If this
rule applies, the sales or purchase branch rules contained in paragraph
(b)(1)(i) of this section do not apply. The application of this
paragraph (b)(1)(ii)(c)(1) is illustrated by the following example:
Example. All activities of controlled foreign corporation
conducted through sales branches and manufacturing branch. (i)
Facts. FS, a controlled foreign corporation organized under the laws
of country M, operates three branches. Branch A, located in country
A, manufactures Product X under the principles of paragraph
(a)(4)(i) of this section. Branch B, located in Country B, sells
Product X manufactured by Branch A to customers for use outside of
Country B. Branch C, located in Country C sells Product X
manufactured by Branch A to customers for use outside of Country C.
FS does not conduct any manufacturing or selling activities apart
from the activities of Branches A, B and C. Country M imposes an
effective rate of tax on sales income of 0%. Country A imposes an
effective rate of tax on sales income of 20%. Country B imposes an
effective rate of tax on sales income of 20%. Country C imposes an
effective rate of tax on sales income of 18%.
(ii) Result. Pursuant to this paragraph (b)(1)(ii)(c)(1),
paragraph (b)(1)(ii)(b) of this section is applied to the sales
income derived by Branch B by treating Branch B as though it alone
were the remainder of the controlled foreign corporation. The use of
Branch B does not have the same tax effect as if Branch B were a
wholly owned subsidiary of FS because the tax rate applicable to the
income allocated to Branch B under paragraph (b)(1)(ii)(b) of this
section (20%) is not less than 90% of, and at least 5 percentage
points less than, the effective rate of tax which would apply to
such income under the laws of Country A (20%), the country in which
Branch A is located. In addition, paragraph (b)(1)(ii)(b) of this
section is applied separately to the sales income derived by Branch
C by treating Branch C as though it alone were the remainder of the
controlled foreign corporation. The use of Branch C does not have
the same tax effect as if Branch C were a wholly owned subsidiary of
FS because the tax rate applicable to the income allocated to Branch
C under paragraph (b)(1)(ii)(b) of this section (18%) is not less
than 90% of, and at least 5 percentage points less than, the
effective rate of tax which would apply to such income under the
laws of Country A (20%), the country in which Branch A is located.
Pursuant to this paragraph (b)(1)(ii)(c)(1), the rules under
paragraph (b)(1)(i) of this section for determining whether a sales
or purchase branch is treated as a separate corporation from the
remainder of the controlled foreign corporation do not apply.
(2) Use of more than one branch to manufacture, produce, construct,
grow, or extract separate items of personal property. If a controlled
foreign corporation carries on manufacturing, producing, constructing,
growing, or extracting activities with respect to separate items of
personal property by or through more than one branch or similar
establishment located outside the country under the laws of which such
corporation is created or organized, then paragraphs (b)(1)(ii)(b) and
(c) of this section will be applied separately to each such branch or
similar establishment (by treating such manufacturing branch or similar
establishment as if it were the only such branch or similar
establishment of the controlled foreign corporation and as if any other
such branches or similar establishments were separate corporations) for
purposes of determining whether the use of such branch or similar
establishment has substantially the same tax effect as if such branch
or similar establishment were a wholly owned subsidiary corporation of
the controlled foreign corporation. The application of this paragraph
(b)(1)(ii)(c)(2) is illustrated by the following example:
Example. Multiple branches that satisfy paragraph (a)(4)(i). (i)
Facts. FS is a controlled foreign corporation organized in Country
M. FS operates two branches, Branch A and Branch B located in
Country A and Country B, respectively. Branch A and Branch B each
manufacture separate items of personal property (Product X and
Product Y, respectively) within the meaning of paragraph (a)(4)(ii)
or (iii) of this section. Raw materials used in the manufacture of
Product X and Product Y are purchased by FS from an unrelated
person. FS engages in activities in Country M to sell Product X and
Product Y to a related person for use, disposition or consumption
outside of Country M. Employees of FS located in Country M perform
only sales functions. The effective rate of tax imposed in Country M
on the income from the sales of Product X and Product Y is 10%.
Country A imposes an effective rate of tax on sales income of 20%.
Country B imposes an effective rate of tax on sales income of 12%.
(ii) Result. Pursuant to this paragraph (b)(1)(ii)(c)(2),
paragraph (b)(1)(ii)(b) of this section is applied separately to
Branch A and Branch B with respect to the sales income of FS
attributable to Product X (manufactured by Branch A) and Product Y
(manufactured by Branch B). Because the effective rate of tax on
FS's sales income from the sale of Product X in Country M (10%) is
less than 90% of, and at least 5 percentage points less than, the
effective rate of tax that would apply to such income in the country
in which Branch A is located (20%), the use of Branch A to
manufacture Product X has substantially the same tax effect as if
Branch A were a wholly owned subsidiary corporation of FS. Because
the effective rate of tax on FS's sales income from the sale of
Product Y in Country M (10%) is not less than 90% of, and at least 5
percentage points less than, the effective rate of tax that would
apply to such income in the country in which Branch B is located
(12%), the use of Branch B to manufacture
[[Page 78548]]
Product Y does not have substantially the same tax effect as if
Branch B were a wholly owned subsidiary corporation of FS.
Consequently, only Branch A is treated as a separate corporation
apart from the remainder of FS for purposes of determining foreign
base company sales income from the sales of Product X.
(3) Use of more than one manufacturing branch, or one or more
manufacturing branches and the remainder of the controlled foreign
corporation, to manufacture, produce, or construct the same item of
personal property--(i) In general. This paragraph (b)(1)(ii)(c)(3)
applies to determine the location of manufacture, production, or
construction of personal property for purposes of applying paragraph
(b)(1)(i)(b) or (b)(1)(ii)(b) of this section where more than one
branch or similar establishment of a controlled foreign corporation, or
one or more branches or similar establishments of a controlled foreign
corporation and the remainder of the controlled foreign corporation,
each engage in manufacturing, producing, or constructing activities
with respect to the same item of personal property which is then sold
by the controlled foreign corporation. This paragraph (b)(1)(ii)(c)(3)
is applied separately with respect to the income derived by each
purchasing or selling branch or similar establishment or purchasing or
selling remainder of the controlled foreign corporation as provided
under paragraphs (b)(1)(i) and (b)(1)(ii) of this section. The location
of manufacture, production, or construction is determined under
paragraph (b)(1)(ii)(c)(3)(ii) of this section if one or more branches
or similar establishments or the remainder of the controlled foreign
corporation independently satisfies paragraph (a)(4)(i) of this section
with respect to an item of personal property. The location of
manufacture, production, or construction is determined under paragraph
(b)(1)(ii)(c)(3)(iii) of this section if none of the branches or
similar establishments or the remainder of the controlled foreign
corporation independently satisfies paragraph (a)(4)(i) of this section
with respect to an item of personal property, but the controlled
foreign corporation as a whole makes a substantial contribution to the
manufacture, production or construction of that property within the
meaning of paragraph (a)(4)(iv) of this section. For purposes of this
paragraph (b)(1)(ii)(c)(3), the location of any activity with respect
to the manufacture, production, or construction of an item of personal
property is determined under paragraph (b)(1)(ii)(c)(3)(iv) of this
section. For purposes of this paragraph (b)(1)(ii)(c)(3), if multiple
branches or similar establishments are located in a single
jurisdiction, then the activities of those branches will be aggregated
for purposes of determining whether a branch or remainder of the
controlled foreign corporation satisfies paragraph (a)(4)(i) of this
section.
(ii) Manufacture, production, or construction in one or more
locations. If only one branch or similar establishment or only the
remainder of a controlled foreign corporation independently satisfies
paragraph (a)(4)(i) of this section with respect to an item of personal
property, then that branch or similar establishment or the remainder of
the controlled foreign corporation will be the location of manufacture,
production, or construction of that property for purposes of applying
paragraph (b)(1)(i)(b) or (b)(1)(ii)(b) of this section to the income
from the sale of that property. See paragraph (b)(1)(ii)(c)(3)(v)
Example 1 of this section. If more than one branch or similar
establishment or one or more branches or similar establishments and the
remainder of the controlled foreign corporation, each independently
satisfy paragraph (a)(4)(i) of this section with respect to an item of
personal property, then the location of manufacture, production, or
construction of that property for purposes of applying paragraph
(b)(1)(i)(b) or (b)(1)(ii)(b) of this section will be the location of
that branch or similar establishment or the jurisdiction under the laws
of which the remainder of the controlled foreign corporation is
organized that satisfies paragraph (a)(4)(i) of this section and that
would, after applying paragraph (b)(1)(ii)(b) of this section to such
branch or similar establishment or paragraph (b)(1)(i)(b) of this
section to the remainder of the controlled foreign corporation, impose
the lowest effective rate of tax on the income allocated to such branch
or the remainder of the controlled foreign corporation under such
section (that is, either paragraph (b)(1)(i)(b) or (b)(1)(ii)(b) of
this section). See paragraph (b)(1)(ii)(c)(3)(v) Example 2 of this
section.
(iii) No location independently satisfies manufacturing test. If no
branch or similar establishment or the remainder of the controlled
foreign corporation independently satisfies paragraph (a)(4)(i) of this
section with respect to an item of personal property but the controlled
foreign corporation as a whole makes a substantial contribution to the
manufacture, production, or construction of that property within the
meaning of paragraph (a)(4)(iv) of this section, then for purposes of
applying paragraph (b)(1)(i)(b) or (b)(1)(ii)(b) of this section, the
location of manufacture, production, or construction with respect to
the income derived by a purchasing or selling branch or similar
establishment or the purchasing or selling remainder of the controlled
foreign corporation in connection with the purchase or sale of that
property will be the ``tested manufacturing location'' unless the
``tested sales location'' provides a greater contribution to the
manufacture, production, or construction of the property. The tested
manufacturing location is the location of any branch or similar
establishment or remainder of the controlled foreign corporation that
contributes to the manufacture, production, or construction of the
personal property, if any, that would, after applying paragraph
(b)(1)(ii)(b) of this section to such branch or similar establishment
or paragraph (b)(1)(i)(b) of this section to the remainder of the
controlled foreign corporation, be treated as a separate corporation
and would impose the lowest effective rate of tax on the income
allocated to such branch or similar establishment or to the remainder
of the controlled foreign corporation under such section (that is,
either paragraph (b)(1)(i)(b) or (b)(1)(ii)(b) of this section). The
tested sales location is the location of the purchasing or selling
branch or similar establishment or the remainder of the controlled
foreign corporation by or through which the purchasing or selling
activities are carried on with respect to the personal property. For
purposes of this paragraph (b)(1)(ii)(c)(3)(iii), the contribution to
the manufacture, production, or construction of the personal property
by the tested sales location will be deemed to include the activities
of any branch or similar establishment or remainder of the controlled
foreign corporation that would not be treated as a corporation separate
from the tested sales location after the application of paragraph
(b)(1)(i)(b) or (b)(1)(ii)(b) of this section. For purposes of this
paragraph (b)(1)(ii)(c)(3)(iii), the contribution of the tested
manufacturing location to the manufacture, production, or construction
of the personal property will be deemed to include any activities of
any branch or similar establishment or remainder of the controlled
foreign corporation that would be treated as a corporation separate
from the tested sales location after the application of paragraph
(b)(1)(i)(b) or (b)(1)(ii)(b) of this section. Whether the tested sales
location provides a greater contribution to the manufacture,
production, or
[[Page 78549]]
construction of the personal property is determined by weighing the
relative contributions to the manufacture, production, or construction
of that property by the tested sales location and the tested
manufacturing location under the facts and circumstances test provided
in paragraph (a)(4)(iv) of this section. See paragraph
(b)(1)(ii)(c)(3)(v) Examples 3, 4, 5, and 6 of this section. If the
tested sales location provides a greater contribution to the
manufacture, production, or construction of the personal property than
the tested manufacturing location or if there is no tested
manufacturing location, then the tested sales location is the location
of manufacture, production, or construction of that property and the
rules of paragraphs (b)(1)(i)(a) and (b)(1)(ii)(a) of this section will
not apply with respect to the income derived by the tested sales
location in connection with the purchase or sale of that property and
the use of that purchasing or selling branch or similar establishment
or the purchasing or selling remainder will not result in a branch
being treated as a separate corporation for purposes of paragraph
(b)(2)(ii) of this section.
(iv) Location of activity. For purposes of paragraph
(b)(1)(ii)(c)(3) of this section, the location of any activity with
respect to the manufacture, production, or construction of an item of
personal property is the location where the employees of the controlled
foreign corporation perform such activity. For example, the location of
any activity concerning intellectual property is determined based on
where employees of the controlled foreign corporation develop or direct
the use or development of the intellectual property, not on the formal
assignment of that intellectual property.
(v) Examples. The following examples illustrate the application of
this paragraph (b)(1)(ii)(c)(3):
Example 1. Multiple branches contribute to the manufacture of a
single product only one branch satisfies paragraph (a)(4)(i). (i)
Facts. FS is a controlled foreign corporation organized in Country
M. FS operates three branches, Branch A, Branch B, and Branch C,
located respectively in Country A, Country B, and Country C. Branch
A, Branch B, and Branch C each performs different manufacturing
activities with respect to the manufacture of Product X. Branch A,
through the activities of employees of FS located in Country A,
designs Product X. Branch B, through the activities of employees of
FS located in Country B, provides quality control and oversight and
direction. Branch C, through the activities of employees of FS
located in Country C, manufactures Product X (within the meaning of
paragraph (a)(4)(ii) or (a)(4)(iii) of this section) using the
designs developed by Branch A and under the oversight of the quality
control personnel of Branch B. The activities of Branch A and Branch
B do not independently satisfy paragraph (a)(4)(i) of this section.
Employees of FS located in Country M purchase the raw materials used
in the manufacture of Product X from a related person and control
the work-in-process and finished goods throughout the manufacturing
process. Employees of FS located in Country M also manage the
manufacturing costs and capacities related to Product X. Further,
employees of FS located in Country M oversee the coordination
between the branches. The activities of the remainder of FS in
Country M do not independently satisfy paragraph (a)(4)(i) of this
section. Employees of FS located in Country M sell Product X to
unrelated persons for use outside of Country M. The sales income
from the sale of Product X is taxed in Country M at an effective
rate of tax of 10%. Country C imposes an effective rate of tax of
20% on sales income.
(ii) Result. Country C is the location of manufacture for
purposes of applying paragraph (b)(1)(ii)(b) of this section because
only the activities of Branch C independently satisfy paragraph
(a)(4)(i) of this section. The use of Branch C has substantially the
same tax effect as if Branch C were a wholly owned subsidiary
corporation of FS because the effective rate of tax on the sales
income (10%) is less than 90% of, and at least 5 percentage points
less than, the effective rate of tax that would apply to such income
in the country in which Branch C is located (20%). Therefore, sales
of Product X by the remainder of FS are treated as sales on behalf
of Branch C. In determining whether the remainder of FS will qualify
for the manufacturing exception under paragraph (a)(4)(iv) of this
section, the activities of FS will include the activities of Branch
A or Branch B, respectively, if each of those branches would not be
treated as a separate corporation under paragraph (b)(1)(ii)(b) of
this section, if that paragraph were applied independently to each
of Branch A and Branch B. See paragraph (b)(2)(ii)(a) of this
section.
Example 2. Multiple branches satisfy paragraph (a)(4)(i) with
respect to the same product sold by the controlled foreign
corporation. (i) Facts. Assume the same facts as in Example 1,
except for the following. In addition to the design of Product X,
Branch A also performs in Country A other manufacturing activities,
including those ascribed to FS in Example 1, that are sufficient to
qualify as manufacturing under paragraph (a)(4)(iv) of this section
with respect to Product X. Country A imposes an effective rate of
tax of 12% on sales income.
(ii) Result. Branch A and Branch C through their activities each
independently satisfy the requirements of paragraph (a)(4)(i) of
this section. Therefore, paragraph (b)(1)(ii)(b) of this section is
applied by comparing the effective rate of tax imposed on the income
from the sales of Product X against the lowest effective rate of tax
that would apply to the sales income in either Country A or Country
C if paragraph (b)(1)(ii)(b) of this section were applied separately
to Branch A and Branch C. Country A imposes the lower effective rate
of tax, and therefore, Branch A is treated as the location of
manufacture for purposes of applying paragraph (b)(1)(ii)(b) of this
section. The effective rate of tax in Country B is not considered
because Branch B does not satisfy paragraph (a)(4)(i) of this
section. Neither Branch A nor Branch C is treated as a separate
corporation because the effective rate of tax on the sales income of
FS from the sale of Product X (10%) is not less than 90% of, and at
least 5 percentage points less than, the effective rate of tax that
would apply to such income in the country in which Branch A is
located (12%). Sales of Product X by the remainder of the controlled
foreign corporation are not treated as made on behalf of any branch.
Example 3. Determining the location of manufacture when
manufacturing activities performed by multiple branches and no
branch independently satisfies paragraph (a)(4)(i). (i) Facts. FS, a
controlled foreign corporation organized in Country M, purchases raw
materials from a related person. The raw materials are manufactured
(under the principles of paragraph (a)(4)(ii) or (a)(4)(iii) of this
section) into Product X by CM, an unrelated corporation, pursuant to
a contract manufacturing arrangement. CM physically performs the
substantial transformation, assembly, or conversion of the raw
materials in Country C. FS has two branches, Branch A and Branch B,
located in Country A and Country B respectively. Branch A, through
the activities of employees of FS located in Country A, designs
Product X. Branch B, through the activities of employees of FS
located in Country B, controls manufacturing related logistics,
provides oversight and direction during the manufacturing process,
and controls the raw materials and work-in-process. FS manages the
manufacturing costs and capacities related to the manufacture of
Product X through employees located in Country M. Further, employees
of FS located in Country M oversee the coordination between the
branches. Employees of FS located in Country M also sell Product X
to unrelated persons for use outside of Country M. Country M imposes
an effective rate of tax on sales income of 10%. Country A imposes
an effective rate of tax on sales income of 20%, and Country B
imposes an effective rate of tax on sales income of 24%. Neither the
remainder of FS, nor any branch of FS independently satisfies
paragraph (a)(4)(i) of this section. However, under the facts and
circumstances of the business, FS as a whole provides a substantial
contribution to the manufacture of Product X within the meaning of
paragraph (a)(4)(iv) of this section.
(ii) Result. Based on the facts, neither the remainder of FS
(through the activities of its employees in Country M) nor any
branch of FS independently satisfies paragraph (a)(4)(i) of this
section with respect to Product X, but FS, as a whole, provides a
substantial contribution through the activities of its employees to
the manufacture of Product X. The remainder of FS, Branch A, and
Branch B each provides a contribution through the activities of
employees to the manufacture of Product X. Therefore, FS must
determine the location of manufacture under paragraph
[[Page 78550]]
(b)(1)(ii)(c)(3)(iii) of this section. The tested sales location is
Country M because the selling activities with respect to Product X
are carried on by the remainder of FS. The location of Branch A is
the tested manufacturing location because the effective rate of tax
imposed on FS's sales income by Country M (10%) is less than 90% of,
and at least 5 percentage points less than, the effective rate of
tax that would apply to such income in Country A (20%), and Country
A has the lowest effective rate of tax among the manufacturing
branches that would, after applying paragraph (b)(1)(ii)(b) of this
section, be treated as a separate corporation. The activities of
Branch B will be included in the contribution of Branch A for
purposes of determining the location of manufacture of Product X
because the effective rate of tax imposed on the sales income by
Country M (10%) is less than 90% of, and at least 5 percentage
points less than, the effective rate of tax that would apply to such
income in Country B (24%). Under the facts and circumstances of the
business, the activities of the remainder of FS would not provide a
greater contribution to the manufacture of Product X than the
activities of Branch A and Branch B, considered together. Therefore,
the location of manufacture is Country A, the location of Branch A.
Example 4. Manufacturing activities performed by multiple
branches, no branch independently satisfies paragraph (a)(4)(i),
selling activities carried on by remainder of the controlled foreign
corporation, remainder contribution includes branch manufacturing
activities. (i) Facts. The facts are the same as Example 3, except
that the effective rate of tax on sales income in Country B is 12%.
In addition, under the facts of the particular business, the
activities of employees of FS located in Country B and Country M, if
considered together, would provide a greater contribution to the
manufacture of Product X than the activities of employees of FS
located in Country A.
(ii) Result. Based on the facts, neither the remainder of FS
(through activities of its employees in Country M) nor any branch of
FS independently satisfies paragraph (a)(4)(i) of this section with
respect to Product X, but FS, as a whole, provides a substantial
contribution through the activities of its employees to the
manufacture of Product X. The remainder of FS, Branch A, and Branch
B each provide a contribution through the activities of their
employees to the manufacture of Product X. Therefore, FS must
determine the location of manufacture under paragraph
(b)(1)(ii)(c)(3)(iii) of this section. The tested sales location is
Country M because the selling activities with respect to Product X
are carried on by the remainder of FS. The location of Branch A is
the tested manufacturing location because the effective rate of tax
imposed on FS's sales income by Country M (10%) is less than 90% of,
and at least 5 percentage points less than, the effective rate of
tax that would apply to such income in Country A (20%), and Branch A
is the only branch that would, after applying paragraph
(b)(1)(ii)(b) of this section, be treated as a separate corporation.
The activities of Branch B will be included in the contribution of
the remainder of FS for purposes of determining the location of
manufacture of Product X because the effective rate of tax imposed
on the sales income by Country M (10%) is not less than 90% of, and
at least 5 percentage points less than, the effective rate of tax
that would apply to such income in Country B (12%). Under a facts
and circumstances analysis, considered together, the activities of
Branch B and the remainder of FS would provide a greater
contribution to the manufacture of Product X than the activities of
Branch A. Therefore, the rules of paragraph (b)(1)(ii)(a) of this
section will not apply with respect to the income derived by the
remainder of FS in connection with the sale of Product X, and
neither Branch A nor Branch B will be treated as a separate
corporation for purposes of paragraph (b)(2)(ii) of this section.
Example 5. Manufacturing activities performed by multiple
branches, no branch independently satisfies paragraph (a)(4)(i),
sales carried on by remainder of the controlled foreign corporation
and a sales branch. (i) Facts. The facts are the same as Example 3,
except that sales of Product X are also carried on through Branch D
in Country D, and Country D imposes a 16% effective rate of tax on
sales income. In addition, under the facts and circumstances of the
business, the activities of employees of FS located in Country A and
Country M, considered together, would provide a greater contribution
to the manufacture of Product X than the activities of employees of
FS located in Country B.
(ii) Result. Based on the facts, neither the remainder of FS nor
any branch of FS independently satisfies paragraph (a)(4)(i) of this
section with respect to Product X, but FS, as a whole, provides a
substantial contribution through the activities of its employees to
the manufacture of Product X. The remainder of FS, Branch A, and
Branch B each provide a contribution through the activities of their
employees to the manufacture of Product X. Therefore, FS must
determine the location of manufacture under paragraph
(b)(1)(ii)(c)(3)(iii) of this section. Further, pursuant to
paragraph (b)(1)(ii)(c)(1) of this section, paragraph
(b)(1)(ii)(c)(3)(iii) of this section must be applied separately to
the sales income derived by the remainder of FS and Branch D
respectively. The results with respect to the income derived by the
remainder of FS in connection with the sale of Product X in this
Example 5 are the same as in Example 3. However, paragraph
(b)(1)(ii)(c)(3)(iii) of this section must also be applied with
respect to Branch D because the sale of Product X is also carried on
through Branch D. Thus, for purposes of that sales income, the
location of Branch D is the tested sales location. The location of
Branch B is the tested manufacturing location because the effective
rate of tax imposed on Branch D's sales income by Country D (16%) is
less than 90% of, and at least 5 percentage points less than, the
effective rate of tax that would apply to such income in Country B
(24%), and Branch B is the only branch that would, after applying
paragraph (b)(1)(ii)(b) of this section, be treated as a separate
corporation. The manufacturing activities performed in Country M by
the remainder of FS and the manufacturing activities performed in
Country A by Branch A will be included in Branch D's contribution to
the manufacture of Product X for purposes of determining the
location of manufacture of Product X with respect to Branch D's
sales income because the effective rate of tax imposed on the sales
income by Country D (16%) is not less than 90% of, and at least 5
percentage points less than, the effective rate of tax that would
apply to such income in Country M (10%) and Country A (20%). Under
the facts and circumstances of the business, the activities of
Branch D, Branch A, and the remainder of FS, considered together,
would provide a greater contribution to the manufacture of Product X
than the activities of Branch B. Therefore, the rules of paragraph
(b)(1)(ii)(a) of this section will not apply with respect to the
income derived by Branch D in connection with the sale of Product X
and the use of Branch D to sell Product X will not result in a
branch being treated as a separate corporation for purposes of
paragraph (b)(2)(ii) of this section.
Example 6. Determining the location of manufacture when
employees of remainder of controlled foreign corporation travel to
location of unrelated contract manufacturer to perform manufacturing
activities. (i) Facts. FS, a controlled foreign corporation
organized in Country M, purchases raw materials from a related
person. The raw materials are manufactured (under the principles of
paragraph (a)(4)(ii) or (a)(4)(iii) of this section) into Product X
by CM, an unrelated corporation, pursuant to a contract
manufacturing arrangement. CM physically performs the substantial
transformation, assembly, or conversion of the raw materials in
Country C. Employees of FS located in Country M sell Product X to
unrelated persons for use outside of Country M. Employees of FS
located in Country M engage in product design, manage the
manufacturing costs and capacities with respect to Product X, and
direct the use of intellectual property for the purpose of
manufacturing Product X. Quality control and oversight and direction
of the manufacturing process are conducted in Country C by employees
of FS who are employed in Country M but who regularly travel to
Country C. Branch A, located in Country A, is the only branch of FS.
Product design with respect to Product X conducted by employees of
FS located in Country A is supplemental to the bulk of the design
work, which is done by employees of FS located in Country M. At all
times, employees of Branch A control the raw materials, work-in-
process and finished goods. Employees of FS located in Country A
also control manufacturing related logistics with respect to Product
X. Country M imposes an effective rate of tax on sales income of
10%. Country A imposes an effective rate of tax on sales income of
20%. Neither the remainder of FS nor Branch A independently
satisfies paragraph (a)(4)(i) of this section. However, under the
facts and circumstance of the business, FS as a whole (including
Branch A) provides a substantial contribution to the manufacture of
Product X within the meaning of paragraph (a)(4)(iv) of this
section.
(ii) Result. Based on the facts, neither the remainder of FS nor
Branch A independently
[[Page 78551]]
satisfies paragraph (a)(4)(i) of this section with respect to
Product X, but FS, as a whole, provides a substantial contribution
through the activities of its employees to the manufacture of
Product X. The remainder of FS and Branch A each provide a
contribution through the activities of employees to the manufacture
of Product X. Therefore, FS must determine the location of
manufacture under paragraph (b)(1)(ii)(c)(3)(iii) of this section.
The tested sales location is Country M because the selling
activities with respect to Product X are carried on by the remainder
of FS. The tested manufacturing location is the location of Branch A
because the effective rate of tax imposed on the remainder of FS's
sales income by Country M (10%) is less than 90% of, and at least 5
percentage points less than, the effective rate of tax that would
apply to such income in Country A (20%), and Branch A is the only
branch that would, after applying paragraph (b)(1)(ii)(b) of this
section, be treated as a separate corporation. Although the
activities of traveling employees are considered in determining
whether FS, as a whole, makes a substantial contribution to the
manufacture of Product X under paragraph (a)(4)(iv) of this section,
the activities of the employees of FS that are performed in Country
C are not taken into consideration in determining whether Country M,
the jurisdiction under the laws of which FS is organized, is the
location of manufacture under paragraph (b)(1)(ii)(c)(3)(iii) of
this section. Activities of employees performed outside the
jurisdiction in which the controlled foreign corporation is
organized and outside a location in which the controlled foreign
corporation maintains a branch or similar establishment, are not
considered in determining the location of manufacture. Under the
facts and circumstances of the business, the activities of employees
of FS performed in Country M do not provide a greater contribution
to the manufacture of Product X than the activities of employees of
FS performed in Country A. Therefore, the location of manufacture is
Country A, the location of Branch A.
(4) Use of more than one branch to manufacture, produce, construct,
grow, or extract separate items of personal property. For purposes of
paragraphs (b)(1)(ii)(c)(2) and (b)(1)(ii)(c)(3) of this section, an
item of personal property refers to an individual unit of personal
property rather than a type or class of personal property.
(2) * * *
(i) * * *
(b) Activities treated as performed on behalf of the remainder of
corporation. (1) With respect to purchasing or selling activities
performed by or through the branch or similar establishment, such
purchasing or selling activities will, with respect to personal
property manufactured, produced, constructed, grown, or extracted by
the remainder of the controlled foreign corporation, be treated as
performed on behalf of the remainder of the controlled foreign
corporation.
(2) With respect to purchasing or selling activities performed by
or through the branch or similar establishment, such purchasing or
selling activities will, with respect to personal property (other than
property described in paragraph (b)(2)(i)(b)(1) of this section)
purchased or sold, or purchased and sold, by the remainder of the
controlled foreign corporation (or any branch treated as the remainder
of the controlled foreign corporation), be treated as performed on
behalf of the remainder of the controlled foreign corporation.
* * * * *
(ii) * * *
(a) Treatment as separate corporations. The branch or similar
establishment will be treated as a wholly owned subsidiary corporation
of the controlled foreign corporation, and such branch or similar
establishment will be deemed to be incorporated in the country in which
it is located. For purposes of applying the rules of this paragraph
(b)(2)(ii), a branch or similar establishment of a controlled foreign
corporation treated as a separate corporation purchasing or selling on
behalf of the remainder of the controlled foreign corporation under
paragraph (b)(2)(ii)(b) of this section, or the remainder of the
controlled foreign corporation treated as a separate corporation
purchasing or selling on behalf of a branch or similar establishment of
the controlled foreign corporation under paragraph (b)(2)(ii)(c) of
this section, will include the activities of any other branch or
similar establishment or remainder of the controlled foreign
corporation that would not be treated as a separate corporation (apart
from the branch or similar establishment of a controlled foreign
corporation that is treated as performing purchasing or selling
activities on behalf of the remainder of the controlled foreign
corporation under paragraph (b)(2)(ii)(b) of this section or the
remainder of the controlled foreign corporation that is treated as
performing purchasing or selling activities on behalf of the branch or
similar establishment under paragraph (b)(2)(ii)(c) of this section) if
the effective rate of tax imposed on the income of the purchasing or
selling branch or similar establishment, or purchasing or selling
remainder of the controlled foreign corporation, were tested under the
principles of paragraph (b)(1)(i)(b) or (b)(1)(ii)(b) of this section
against the effective rate of tax that would apply to such income if it
were considered derived by such other branch or similar establishment
or the remainder of the controlled foreign corporation.
(b) Activities treated as performed on behalf of the remainder of
corporation. (1) With respect to purchasing or selling activities
performed by or through the branch or similar establishment, such
purchasing or selling activities will, with respect to personal
property manufactured, produced, constructed, grown, or extracted by
the remainder of the controlled foreign corporation, be treated as
performed on behalf of the remainder of the controlled foreign
corporation.
(2) With respect to purchasing or selling activities performed by
or through the branch or similar establishment, such purchasing or
selling activities will, with respect to personal property (other than
property described in paragraph (b)(2)(ii)(b)(1) of this section)
purchased or sold, or purchased and sold, by the remainder of the
controlled foreign corporation (or any branch treated as the remainder
of the controlled foreign corporation), be treated as performed on
behalf of the remainder of the controlled foreign corporation.
* * * * *
(d) [Reserved].
(e) Comparison with ordinary treatment. Income derived by a branch
or similar establishment, or by the remainder of the controlled foreign
corporation, will not be foreign base company sales income under
paragraph (b) of this section if the income would not be foreign base
company sales income if it were derived by a separate controlled
foreign corporation under like circumstances.
* * * * *
(4) Illustrations. The application of this paragraph (b) may be
illustrated by the following examples:
* * * * *
Example 3. (i) Facts. Corporation E, a controlled foreign
corporation incorporated under the laws of foreign Country X, is a
wholly owned subsidiary of Corporation D, also a controlled foreign
corporation incorporated under the laws of Country X. Corporation E
maintains Branch B in foreign Country Y. Both corporations use the
calendar year as the taxable year. In 1964, Corporation E's sole
activity, carried on through Branch B, consists of the purchase of
articles manufactured in Country X by Corporation D, a related
person, and the sale of the articles through Branch B to unrelated
persons. One hundred percent of the articles sold through Branch B
are sold for use outside Country X and 90% are also sold for use
outside of Country Y. The income of Corporation E derived by Branch
B from such transactions is taxed to Corporation E by Country X only
at the time Corporation E distributes such income to Corporation D
and
[[Page 78552]]
is taxed on the basis of what the tax (a 40% effective rate) would
have been if the income had been derived in 1964 by Corporation E
from sources within Country X from doing business through a
permanent establishment therein. Country Y levies an income tax at
an effective rate of 50% on income derived from sources within such
country, but the income of Branch B for 1964 is effectively taxed by
Country Y at a 5% rate since under the laws of such country, only
10% of Branch B's income is derived from sources within such
country. Corporation E makes no distributions to Corporation D in
1964.
(ii) Result. In determining foreign base company sales income of
Corporation E for 1964, Branch B is treated as a separate wholly
owned subsidiary corporation of Corporation E, the 5% rate of tax
being less than 90% of, and at least 5 percentage points less than
the 40% rate. Income derived by Branch B, treated as a separate
corporation, from the purchase from a related person (Corporation
D), of personal property manufactured outside of Country Y and sold
for use, disposition, or consumption outside of Country Y
constitutes foreign base company sales income. If, instead,
Corporation D were unrelated to Corporation E, none of the income
would be foreign base company sales income because Corporation E
would be purchasing from and selling to unrelated persons and if
Branch B were treated as a separate corporation it would likewise be
purchasing from and selling to unrelated persons. Alternatively, if
Corporation D were related to Corporation E, but Branch B
manufactured the articles prior to sale under the principles of
paragraph (a)(4)(iv) of this section, the income would not be
foreign base company sales income because Branch B, treated as a
separate corporation, would qualify for the manufacturing exception
under paragraph (a)(4) of this section.
* * * * *
Example 8. Uniformly applicable incentive tax rate in one
country. (i) Facts. FS is a controlled foreign corporation organized
in Country M. FS operates one branch, Branch A, located in Country
A. Branch A manufactures Product X within the meaning of paragraph
(a)(4)(ii) or (a)(4)(iii) of this section. Raw materials used in the
manufacture of Product X are purchased by FS from an unrelated
person. FS engages in activities in Country M to sell Product X to a
related person for use outside of Country M. Employees of FS located
in Country M carry on only sales functions. The effective rate
imposed in Country M on the income from the sale of Product X is
10%. Country A generally imposes an effective rate of tax on income
of 20%, but imposes a uniformly applicable incentive rate of tax of
10% on manufacturing income and related sales income.
(ii) Result. The use of Branch A to manufacture Product X does
not have substantially the same tax effect as if Branch A were a
wholly owned subsidiary corporation of FS because the effective rate
of tax on FS's sales income from the sale of Product X in Country M
(10%) is not less than 90% of, and at least 5 percentage points less
than, the effective rate of tax that would apply to such income in
the country in which Branch A is located (10%). Consequently,
pursuant to paragraph (b)(1)(ii)(b) of this section, Branch A is not
treated as a separate corporation apart from the remainder of FS for
purposes of determining foreign base company sales income.
Example 9. Manufacturing activities performed by multiple
branches, no branch independently satisfies paragraph (a)(4)(i),
selling activities carried on by remainder of the controlled foreign
corporation, some branch manufacturing activities included in
remainder contribution. (i) Facts. FS, a controlled foreign
corporation organized in Country M, has three branches, Branch A,
Branch B, and Branch C, located in Country A, Country B, and Country
C respectively. FS purchases raw materials from a related person.
The raw materials are manufactured (under the principles of
paragraph (a)(4)(ii) or (a)(4)(iii) of this section) into Product X
by CM, an unrelated corporation, pursuant to a contract
manufacturing arrangement. CM physically performs the substantial
transformation, assembly, or conversion required to manufacture
Product X outside of FS's country of organization. FS manages the
manufacturing costs and capacities with respect to the manufacture
of Product X through employees located in Country M. Further,
employees of FS located in Country M oversee the coordination
between the branches. Branch A, through the activities of employees
of FS located in Country A, designs Product X, controls
manufacturing related logistics, and controls the raw materials and
work-in-process during the manufacturing process. Branch B, through
the activities of employees of FS located in Country B, provides
quality control. Branch C, through the activities of employees of FS
located in Country C, provides oversight and direction during the
manufacturing process. Employees of FS located in Country M sell
Product X to unrelated persons for use outside of Country M. Country
M imposes an effective rate of tax on sales income of 10%. Country A
imposes an effective rate of tax on sales income of 12%, Country B
imposes an effective rate of tax on sales income of 24%, and Country
C imposes an effective rate of tax on sales income of 25%. None of
the remainder of FS, Branch A, Branch B, or Branch C independently
satisfies paragraph (a)(4)(i) of this section. However, under the
facts and circumstances of the business, FS, as a whole, provides a
substantial contribution to the manufacture of Product X within the
meaning of paragraph (a)(4)(iv) of this section. Under the facts and
circumstances of the business, the activities of the remainder of FS
and Branch A, if considered together, would not provide a greater
contribution to the manufacture of Product X than the activities of
Branch B and Branch C, if considered together. Under the facts and
circumstances of the business, however, the activities of the
employees of the remainder of FS and Branch A, if considered
together, would constitute a substantial contribution to the
manufacture of Product X.
(ii) Result. Based on the facts, neither the remainder of FS
(through activities of its employees in Country M) nor any branch of
FS independently satisfies paragraph (a)(4)(i) of this section with
respect to Product X, but FS, as a whole, provides a substantial
contribution through the activities of its employees to the
manufacture of Product X. The remainder of FS, Branch A, Branch B,
and Branch C each provide a contribution through the activities of
employees to the manufacture of Product X. Therefore, FS must
determine the location of manufacture under paragraph
(b)(1)(ii)(c)(3)(iii) of this section. The tested sales location is
Country M because the selling activities with respect to Product X
are carried on by the remainder of FS. The location of Branch B is
the tested manufacturing location because the effective rate of tax
imposed on FS's sales income by Country M (10%) is less than 90% of,
and at least 5 percentage points less than, the effective rate of
tax that would apply to such income in Country B (24%), and Country
B has the lowest effective rate of tax among the manufacturing
branches that would, after applying paragraph (b)(1)(ii)(b) of this
section, be treated as a separate corporation. The manufacturing
activities performed in Country A by Branch A will be included in
the contribution of the remainder of FS for purposes of determining
the location of manufacture of Product X because the effective rate
of tax imposed on the sales income by Country M (10%) is not less
than 90% of, and at least 5 percentage points less than, the
effective rate of tax that would apply to such income in Country A
(12%). The manufacturing activities performed in Country C by Branch
C will be included in the contribution of Branch B for purposes of
determining the location of manufacture of Product X because the
effective rate of tax imposed on the s